Determining the right credit limit for optimal FICO score?

November 29, 2007 7:02 AM

How many credit cards should I have and what should my limits be for the best possible credit score?

I currently have three credit cards. I use one or two of them for routine purchases throughout the month, but I pay them off when the bill arrives and do not carry a balance. The issuers periodically send me letters saying they've raised my credit limit. I now have way more credit than I really want or need, but I am also confident that I won't abuse it either.

I've heard that the FICO score is partially based on your number of credit cards, the ratio of the balance to credit limit and maybe the ratio of total balance to income. In my case, I may charge up to 25% of my net monthly income, but always pay it off at the end of the month. The total credit limit across all three cards is about 35% of my net annual income.

Given the above, how can I determine how my credit limits should be set for the optimal FICO score?

posted by amfea to Work & Money (7 answers total)

In my experience, Fair Isaac's own FICO estimator is an accurate estimate of your actual score. It asks for the total number of cards you have, your ratio of balance to available credit, etc., so perhaps you can try feeding it different criteria to see if opening another account or closing an existing one would benefit your score.
posted by Diggins at 7:55 AM on November 29, 2007 [1 favorite]

It sounds like you are contemplating declining the credit limit increases at some point. It's my understanding that this won't help your credit score.

First, the credit reporting agencies wouldn't have consistent information about your income. I don't think they even track it. What they're really looking at is what percent of your total credit card limits do your credit card balances represent? (That's a direct quote from the FICO estimator linked above.)

Also, remember that there are several factors that will influence the score. Opening up a bunch of new lines (i.e. credit cards) will help your score by increasing your total credit available and reducing your total utilizaton, but will hurt your score by adding inquiries to your account and lowering the average age of your credit lines.
posted by QuantumMeruit at 9:04 AM on November 29, 2007

You want the highest limits possible. As for number of accounts, on one of my credit scores (Transunion, Equifax, one of those), they tell you things helping your score and things hurting it, and it said I had too many revolving accounts (I have a bunch that I pay off every month and choose between kinda randomly), and that three was the ideal. YMMV. Oh, and you didn't mention the so-called "good debt" of installment accounts (car loans, student loans, mortgage, even those "pay for your new fridge in 10 easy installments" loans) -- supposedly it helps to have one or two of those.
posted by salvia at 9:39 AM on November 29, 2007

You don't want the highest limits possible. You want a good debt to available credit ratio, and yes, higher limits do accomplish this. However, at some point, your available credit goes beyond a level that you could reasonably pay back, and you become a liability. You could conceivably borrow a great deal of money at once with no real intention of paying it all back.

I've heard 3-4x your annual income quoted as the cutoff point where you start to seem "risky"--unfortunately, I can't cite this. I'd recommend poking around sites like bankrate. They tend to run a lot of articles about the finer points of credit scores. From the looks of it, though, you've got a long way to go before you start looking like a risk. It's probably in your interest to accept any line of credit increase, but consider getting rid of some of the cards you use less (except your oldest account--always leave this open, if possible).
posted by almostmanda at 10:00 AM on November 29, 2007

Best answer: Actually, here's an answer to the exact question asked, I think:

B. Keep your apparent credit "utilization" low.

BOTH the percentage use REPORTED to the CRCs (which may differ from what's actually USED) on EACH available line, AND the total (aggregate) percentage used across ALL your REPORTING lines, are the crucial factors here. The degree to which these respective factors will matter varies considerably. I'll offer my more subjective opinions below. But it's safe to say categorically it's best NEVER to go above 90% on any line, especially a large line--and never to go above 50% on all your lines combined. Below the 90% threshold, there's ample evidence that 50% is a key level, and somewhat less evidence that 70% and 30% are used as "break points" for credit scoring models as well.


(From the "FAQ + discussion: GETTING, KEEPING high credit / FICO scores. Glossary, data points, utilization, etc. Updated 7/23/06 " thread on Fatwallet finance at http://www.fatwallet.com/forums/messageview.php?catid=52&threadid=634740.)

Note that some of the information in that post is slightly out of date (in particular, "authorized user" status no longer helps your score).
posted by QuantumMeruit at 10:04 AM on November 29, 2007 [1 favorite]

Response by poster: Thanks for a lot of really great answers. QuantumMeruit's response was exactly what I was looking for and I'll be trying that advice against the FICO estimator diggins recommended.
posted by amfea at 5:38 PM on November 29, 2007

As a potentially useful datapoint, my wife and I just got a mortgage, so I know our actual credit scores from all 3 agencies (at least as of a few months ago). The FICO Estimator was pretty damned close.
posted by JMOZ at 9:08 AM on November 30, 2007