Can You Have Too Much Credit?

When you started building your credit profile, it might have helped to open a few accounts. But is it possible to have too much credit?

It turns out that your credit score is more about how you use your available credit than how much credit you have. Here’s a look at some of the factors that go into your credit score and how having more accounts can sometimes hurt instead of help you.

Number of Open Accounts

One of the ways credit reporting bureaus generate your credit score is by reviewing the number of accounts you have open. Since maintaining one account in good standing is easier than maintaining multiple accounts in good standing, the more healthy accounts you have, the higher your score will be.

That said, how you use those open accounts can have an impact on your score. This is where the “too much credit” conversation really begins.

Use of Available Credit

It’s fantastic to have built a credit history using multiple accounts with histories of on-time payments. But how much available credit do you have? If you have five credit cards with a $2,000 limit and you’re carrying a balance of $1,500 on each card, you may be using “too much credit.”

According to Experian, using a large percentage of your available credit can signal that you’re having trouble paying existing debts. This relates to what the credit bureaus call your “utilization rate.” Your utilization rate is calculated by dividing the balances across all your open cards by the total available credit limit across those cards. The lower your utilization rate, the higher your credit score.

Impact of Closing Accounts

You might think that closing a few accounts will help your “too much credit” situation. Unfortunately, when you close a credit card, you’re reducing your total available credit. This, in turn, affects your utilization rate. Even if you’ve paid the balances in full, closing a card could temporarily lower your credit score.

Still, there are good reasons to close credit accounts. It can remove the temptation to spend, reducing your potential to incur more debt. Or your credit score might show “too many revolving accounts” as a risk factor, referring to accounts (like credit cards) whose balances you’re allowed to carry over from one month to the next. If you see this risk factor listed on your credit report, closing a revolving account or two can help you ultimately up your score.

Of course, there’s only one way to know what factors could be hampering your credit score: by checking. Check your scores regularly — once a quarter is fine — to make sure that your credit activity is working for you, not against you.

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