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The Good and Bad of Open Credit

There is both good open credit and bad open credit. One, obviously, helps you improve your credit score. The other punches your credit score in the gut. Let’s take a look at some basics of open credit and then the difference between the good and bad open credit.

The Basics

The amount of available credit you have isn’t that big of a deal. It is a factor, but not a great one. What matters more with regards to your credit score is your debt-to-credit ratio. Ask yourself how much of your credit you’ve used on any or all your cards. Depending on the answer, that’ll have either a negative or positive effect on your score.

The Good

Once you’ve looked at how much you’ve put on your card, take a look at what percentage of your card limit that is. Here’s an easy one. Let’s say you have a credit card with a limit of $1,000. Of that $1,000 you spent $300 on 25 packs of Dill Pickle Lip Balm. Let’s just say. As a rule of thumb, you should limit any card balance to 30% of your limit. Anything over that could negatively impact your score.

That being said, having a lot of open credit is not necessarily a bad thing. What bureaus really look at is the debt-to-credit ratio. As long as you stay under 20%-30% of your credit limit across all cards and accounts, you should be fine. This is good open credit. This will help bolster your score without putting you into tremendous debt.

The Bad

It’s not hard to imagine what the bad is. Assuming you have quite a bit of open credit with high balances, that will start to dwindle your score. The reason this is an issue is because of how debt is looked at. 

If you use 80% of your available credit and pay it in full every month, that looks great to you. No interest charges are being incurred and you’re paying your debt quickly. But since each balance on your credit report is just a snapshot taken on a random day, your credit report will always look like you have 80% of your available credit outstanding. That looks scary and will negatively affect your credit score. 

The Point

There’s not really a thing as too much credit. You can have a sizable amount and your credit will not be dinged. There is, however, using too much of your available credit. Make sure you stay below that 30% line. A safe tip might be to not exceed 20% just to be safe. If you’re desperate to get more credit, apply for a credit limit increase. That makes the 20% threshold higher, freeing up additional funds for you to play with. A helpful tip is to have three or four lines of credit available. That makes it easy to manage and you’re not tempted to overspend.