Most people know that having too little credit – including a short credit history or not much available credit due to maxed-out credit cards – can hurt their credit score. However, not everyone realizes that it’s also possible to have too much credit. It’s something that can happen, and it can create an imbalance that also negatively impacts your score.
In some cases, this can make one of the classic credit card tips – requesting a limit increase to reduce your credit utilization ratio – an unwise move. While it may not cause your score to plummet immediately, it may lead to some difficulties down the line. The same goes for opening new lines of credit.
If you’re wondering how an excess of available credit can work against you — and how to figure out how much credit is too much — here’s what you need to know.
The Trouble With Too Much Credit
When you have too much credit, certain issues can crop up. While they aren’t all guaranteed to happen, understanding what may come with the territory is helpful. It lets you know the risks of opening new accounts or increasing your limits — and ultimately allows you to make wiser choices about your credit. Here’s a look at some of the challenges that might come up if you have too much credit.
More Credit Accounts Means More Payments to Track
While it’s possible to get a single, high-limit card, many people with ample amounts of revolving credit have several accounts open. Usually, the more accounts a person has, the harder it is to track the monthly payments and due dates. This increases the chances of forgetting to make a payment — or forgetting about an account entirely.
Considering that a missed payment can reduce your credit score by as much as 180 points, ensuring you make on-time payments is essential. By reducing your total number of accounts and keeping balances low, that’s far easier to do.
Having Many Inquiries and New Accounts Could Hurt Your Score
Having the occasional hard credit pull or new account on your credit report doesn’t typically make a harmful, lasting impact on your score. However, if you’re opening new accounts or requesting limit increases regularly, you’re likely dragging your score down.
Having multiple hard inquiries on your report makes you look like a bigger credit risk to lenders. Often, and even if it doesn’t describe your situation at all, it’s because the lenders perceive you as uncontrollably seeking out more money, which could be a sign of financial trouble. This may also lead them to believe you have newly opened accounts that aren’t showing on your credit report yet, making you a riskier borrower than you currently appear to be.
Opening several new accounts in quick succession also reduces the average age of your credit accounts overall. That figure accounts for about 15% of your credit score, with age higher numbers working in your favor because they demonstrate to lenders that you’ve been responsible with credit over a longer period. If you keep pulling the average age of your accounts down, your score will likely drop in response.
Higher Borrowing Potential Can Limit Your Options
Too much credit can limit your access to other credit options. For example, say you have an annual income of $50,000 and have $45,000 in revolving credit lines. Even if you’re only using 10% of that credit amount, lenders may hesitate to give you an auto loan.
The main reason lenders might decline your application is that, if they were to finance your car and then you later maxed out your revolving credit lines, you could struggle to repay the loan. Essentially, you could get yourself into financial trouble without having a change in income or applying for new credit, and that can make some lenders wary.
How Much Credit Is Too Much?
There isn’t a hard-and-fast number that lets you know you have too much credit. Mainly, this is because everyone’s situation is different, so the way your available credit or credit limits are perceived varies.
Generally, you want to make sure your credit limits make sense based on your income level. On average, Americans have a total credit limit (across all of their credit cards) of about $22,751, which can serve as a potential baseline if your income is near average.
However, that doesn’t account for the total amount of monthly payments you’d need to make if you maxed out every card, which is something lenders will consider. If you have multiple high-interest cards, including store cards, that may look riskier than a high credit limit on a single, low-interest card, so keep that in mind.
Along with keeping your credit card limits in check, you’ll want to make sure any other form of revolving credit you have, such as a home equity line of credit, is also set at a logical point. Those also represent potential obligations and could impact your creditworthiness in the eyes of lenders, should you need another kind of credit.
Ultimately, you want to make sure you have enough credit to help your score without limiting your access to other credit types when you need them. Take a look at your total picture, calculate your debt-to-income ratio as if every card was maxed out, and use that figure to determine if you have too much credit. If so, you might consider requesting limit reductions to bring things back to a reasonable point. This can lower your score in the short term, but it can be a wise long-term move.
Keeping Your Credit Limit in Line
Generally, there are two approaches for ensuring your total credit limit stays manageable. The first is to reduce your number of accounts. If you’re concerned that you have too much credit, create a list of all of your revolving accounts. Include details about the limit, interest rate, monthly payment arrangement and age of each account. That makes it easier to determine if you should close specific cards over others.
Second, you can request credit line reductions. Generally, you’ll only want to go this route if you can still preserve a reasonable credit utilization ratio. Ideally, that figure should stay at or below 30%, though lower is always better. If a credit line reduction pushes you far above that figure, you may want to focus on paying down that debt first and then making the request. That way, you can keep your credit score as high as possible while working toward a total credit limit that’s more reasonable to lenders.