After reading the article Meet the credit-card king with $300,000 in credit. I was compelled to stake my claim! If Pete D’arruda is the credit king then what am I?
Mr. D’arruda has me beat in the total number of cards but, I have him beat on total available credit. I have 16 credit cards from major banks with a total of $336,100.00 in total available credit. Let that marinate for a second….16 CREDIT CARDS AND $336,100.00 IN TOTAL CREDIT.
Now before you stop reading my blog and curse me to the depths of whatever bad place you have in your mind. Read the rest of this article first. Of my $336,100 in total available credit, I have used only $5,920.14. I should really say I have used zero since the balance is paid off in full every month. But, credit report updates work in 30 day arrears and my last statement balance was $5,920.14. Hence, the total credit used of $5,920.14.
So, you probably are wondering. Why Mr. YFS Why? I heard credit cards are bad news bears. Why do you have so many? More importantly why do you have so much available credit if you don’t use it? Good question! Let me tell you why.
Back in the day. Oh let’s say 2001. Hey don’t judge me! I use to frequent the fatwallet.com forums. There are tons of posts on how to improve your credit score and accumulate large credit limits. The advice of the forums mixed with my knowledge of how credit scores work, I took it upon myself to improve my credit score by obtaining 12 credit cards. The other 4 credit cards were obtained roughly 4 years ago. Fortunately it worked out for the best and my credit score has improved because of it.
A credit score assigns a number to your creditworthiness — based on your credit history. The calculations are complex and take into account a number of related factors. It’s actually 5 factors. Let’s analyze the parts that make up a person’s credit score from most important to least important.
This one is simple. Credit reports are a collection of your credit past. Starting from the first day you established credit to 30 days ago. 35% of your score is derived from how timely you made payments.
This is how much outstanding debt you have. Now this is were I shine. See the “amounts owed” is synonymous with the term “credit utilization”. A good rule of thumb for credit utilization is no more than 30%. Keep in mind the lower the credit utilization or amounts owed the better you look to the credit report algorithm. To determine your credit utilization percentage. Simply, divide the amount of credit used by the total amount of available credit and multiply by 100.
Using the numbers specified above, let’s see what my credit card utilization percentage is:
Amount of credit used = $5920.14
Total available credit = $336,100.00 ($5,920.14 / $336,100) * 100 = 1.76%
Here is the kicker! The credit algorithm only cares about the credit utilization percentage in determining your credit score. So if you had a credit card with a limit of $10,000 and only used $176. You and I would be considered equals according the credit algorithm.
Why? Because we have the same credit utilization percentage.
($176 / $10,000) * 100 = 1.76% credit utilization.
But, say you had an emergency and you had to use your credit card to purchase something for $2,000.00 while you had your existing balance of $176. Your credit utilization would not be 1.76% any longer but 21.76%! ($2,176/$10,000)*100 = 21.76% credit utilization.
Under the same scenario, if I had to purchase something for an additional $2000.00 on top of my $5920.14 balance. My credit utilization score would be 2.35% ($7920.14 / $336,100) * 100 = 2.35% credit utilization Now we are not considered the same credit risk in the eyes of the credit report algorithm even though we just experienced the same emergency. My credit score will stay relatively, your credit score would most likely drop significantly.
Length of credit history:
The longer the credit history the better. Having a longer credit history is favorable because it gives more information about your spending habits. NEVER CLOSE A CREDIT CARD. You will erase all that good payment history since a closed credit card account will not remain on your credit report after 7 years. Keep in mind that your average credit history length is shortened every time you open a new line of credit. When I opened 12 cards at once in 2001 I took a major hit to my credit score because my average credit history length was shortened.
Each time you apply for credit an inquiry shows up on your credit report. Even if you do not get the credit line but were just looking your credit score will be affected. But, the credit report algorithm usually will accommodate you for credit shopping if all the inquiries were all in the same time-frame.
Say you’re looking for a car or home, and you are trying to obtain the best rate from several banks and credit unions. The credit report algorithm will notice your pattern and eliminate or lessen the impact of your credit rate shopping on your credit score. But, if you’re shopping for credit on various credit types on random intervals the credit report algorithm will not accommodate you and your score will be negatively affected by your actions. I took a big negative hit on my credit score in 2001. But, luckily time was on my side before I actually needed to use my credit score.
Types of credit used:
All credit is not the same. A credit card isn’t considered the same thing as a mortgage in the eyes of the credit algorithm.
There are two types of credit.
Installment: Something you pay on specific terms for a defined period of time. Think mortgage or car loan.
Revolving: Credit that allows you to borrow repeatedly. Think credit card or home equity line of credit.
The credit score algorithm is propriety but it seems that the type of revolving credit or the type of installment credit you have has a bearing on your credit score. It is best to have a mix of all types of credit. Until I established other forms of credit my credit score was negatively affected by obtaining the 16 credit cards.
So did my plan work?
Well let me explain. Credit scores are on a scale from around 300 to 850, with 850 being the highest credit score possible. My 3 credit scores are Equifax – 800 Experian -792 Transunion – 796. In January 2011 the national average credit scorewas 692. I would say my plan worked out well. I was able to take advantage of today’s mortgage rates and refinances my home to save $270,000.
Would I recommend my path to credit score dominance? Nope. Statistics have shown that people with available credit can’t handle it. But there are less risky ways to improve your credit score without obtaining 16 or in Mr. D’arruda’s case 25 credit cards.
How to improve your credit score
- Pay bills on time.
- Keep the balances on all credit cards/revolving lines of credit under 30%.
- Pay off debt.
- Do not close your credit cards.
- Do not get new credit accounts unless it’s needed. (No store cards even if you get 5% off your next purchase!)
- Obtain a mix of credit types (But only seek credit if you need it)
- Be smart about it. Treat your credit card like cash. If it’s not in your budget don’t buy it!
Attention Readers: How do you feel about the use of credit? What do you use it for? Am I crazy for having 16 credit cards?