One of the most popular articles on this site is an article I wrote last year about ‘piggybacking’ off someone’s credit(1,121 views in just the past month alone). In the article, I actually did a case study where I added my fiancee as an authorized user to my AMEX Gold card and compared her scores and report before and after.
Needless to say, strong credit is a very important aspect of people’s lives and at the bare minimum you’ll need credit if you ever want to purchase a house. But some employers and even landlords are starting to check credit scores when screening potential hires or tenants so it’s more important than ever to maintain good credit. You can read all about maintaining good credit and my free identity theft protection plan if you’re interested in learning more about credit but today I’m going to answer a reader question about raising your credit limits. Reader DD writes in:
Quick question. I now have a credit score of 755(up from 680) and I can qualify for a bunch of new credit cards. I have two now, one is an old one with a low low limit and another that is two years old with an OK limit of 2500 dollars. I want my utilization to be less than 30% of my total limit to benefit my score. What can I do? Should I get another card with an awesome limit? Should I dump the old high interest low limit card? Should i increase the limit of my low limit and high limit cards?
Just Getting Started
When you’re first getting started with building credit, your score will be dominated by the low age of your accounts, the total limit of your accounts and your utilization. There’s not a whole lot you can do about the low age of your accounts other than wait it out. You always want to keep your oldest line of credit open even if you rarely use the card.
Utilization is the percentage of available credit that you’re using. So in DD’s case, he has 1 card with a $500 limit and another with a $2,500 limit so his total monthly limit would be $3,000. If he spends just $1,000 a month and pays it off every month, he’ll still have a reported balance of $1,000 giving him a 33% utilization. You want your utilization to be as low as possible.
Tip: If you ever plan on applying for a big loan and are worried about the Debt to Income Ratio, you should consider not using credit cards for one month before applying. That way, when you apply for the loan they’ll see a $0 monthly balance instead of $xx amount. It doesn’t even matter if you pay off your balance in full every month since credit card companies will report your current balance to the credit bureaus.
What’s the Solution?
Here’s my response to DD:
A 755 score is great, that’s about what I’m at too. Closing cards that you don’t use can actually hurt your credit score since it will reduce your total available credit(won’t be a huge issue in your case if you have low limits) but if the card that you’re going to close is very old, it will reduce your average age of credit lines. It probably won’t matter much if the card is only 1-2 years old, but if it’s any older than that, I would keep it around(as long as there’s no annual fee).
Are you paying off your credit card in full every month? If no, that would be the first thing I would focus on. The interest rates credit card companies charge are seriously ridiculous. Once you’ve got a handle on that, you can usually call your credit card company and ask for an increased limit. You can tell them you have some large purchases coming up, you plan on traveling, etc. That will help the utilization part of your score which is calculated by taking your outstanding debt divided by your total credit limit.
In your situation, I would probably keep both cards but call both of them up and ask for a limit increase. Even if they agree, I still might open one more and try to get a nice high limit solid card that you can use for all your purchases from now on. Just make sure to pay the balance off in full every month. If you’re the type to put a lot of things on credit when you don’t have that much money in savings, a high limit card is a bad idea.
With a mid 700 score you should easily be able to get any of the entry level cards with Chase, Citi, etc. These cards should all have no annual fees and a lot of them have nice cash back rewards like 3% on gas, 2% on groceries and 1% on everything else.
So in summary, I would keep both cards but ask for a higher limit on each one and probably open a new entry level card like the Citi Preferred Card where it’s easy to get approved and you can get a super high limit of 10k+. That would bring his total number of cards to 3 which isn’t overly complicated in my books. At that point, he could even close his $2,500 limit card(since it’s newer) if he wants to simplify things even further. I’d probably keep the low limit oldest card though because age is one thing you can never get back.
Readers, how’s your credit profile? Do you care about your credit score or do you only worry about it when you need financing?
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-Harry @ PF Pro