October 2, 2007, 10:45 am

Improve your credit 102: How much credit is optimal?

by: The Financial Blogger    Category: Improve your credit score
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This is a great question and it was debated on many blogs. However, while I am not saying I am in possession of the absolute truth, I can give you a bit of insider information as I am a banker and I know credit inside out.
Improve your credit score

Building a strong credit score requires a lot of self discipline and a great control over your personal finance.The best way to improve your credit score is to show the financial institutions that you are able to use your available credit while making your payments on time and not overloading your credit card.

Use your credit card on a monthly basis

Credit is all about confidence. It is related to financial institutions’ confidence in your ability to pay them back. If you do not use your credit, how would they be able to know if you are able to pay back or not? The easiest way to improve your credit score is by using your credit cards every month. Credit cards companies always report to credit reporting agencies such as Equifax or Transunion. This monthly update will provide financial institutions with relevant information in regards to your payment abilities. Credit cards are also one of the easiest type of credit to get. A bit of income, a two pages application and you receive your new card in the mail along with a free T-Shirt!

Manage the balance on your credit cards

Another factor that influences your credit score is the balance used versus the amount of credit you have at your disposition. This is what we call the “balance to available credit ratio”. You divide what you owe by your total credit limit (this include all revolving and non-revolving credit). If this ratio is high, your Beacon Score will be hurt. The key is to keep balance at a low level. The best way to improve your credit score is to pay the entire balance of your credit score on a monthly basis. Therefore, the credit reporting agency will give less importance in the credit card balance when they calculation your score. You are also better off with 1K owed on five different cards than one card with a limit of 5K that is maxed out.

Keep several accounts opened and active

This is where it gets tricky. Too many credit accounts will scare most bank and make your credit score drop because you have potentially access to too much credit. However, if you only have one of two credit cards, your balance to available credit ratio will suffer. The key is to keep about three to five credit cards and use them on a monthly basis. Credit cards are free of use and give reward point. Click here if you want more information on why you should use your credit cards. If you have substantial limit, such as over 10K, I would recommend only three cards. However, if you are starting to build your credit history, your credit card limit will be lower. Then, you should get about five cards. The key is to use them on a regular basis and paying the whole balance whenever you get your bill. Don’t be late, if not it will eliminate any improvement on your credit score.

In the end, you will be able to improve your credit score by using three to five credit cards on a regular basis and pay the entire amount upon reception of your monthly statement. With that method, you will not only improve your credit score but you will also gain rewards points. The best part is that it will not cost anything as stores are paying for the credit cards usage, not you!


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I disagree with this advice in principle. Although I am not a bank insider I am speaking on experience with my bank. My intuition is that 3 to 5 credit cards is way too many. I have one credit card with a high limit and points that I use all the time. I have one other credit card with a very low limit that I can use if something happens to the first credit card. I pay all my credit cards to zero every month.

I used to have two credit cards with a large limit because I once did a low-interest credit card loan to play the stocks for a year and after it was paid off I left it active. Then I had to get a mortgage. The mortgage agent pulled all my credit history and as we went over the calculations she used them as if I had maxed out all my available credit. I asked her why and she said it was because the bank wouldn’t know how I would come up with my downpayment so they just play it safe and assume I would borrow 30K on all my credit cards, which adds something like $450 per month to my loan servicing, which put me, at the time, very close to the limit for my mortgage.

Since then I cancelled all my un-needed credit cards. Even though I do participate in the low interest deals if they come up and they’re good enough. I always cancel the card if they won’t renew the deal upon finishing. Now I have about 1/2 or 1/3 of the credit cards that I used to have and I’ve since purchased 2 investment properties with zero trouble.

The one method I use to keep up good credit rating is I have one card which sits in a drawer somewhere with one charge on it every month- my newspaper subscription. I pay it down on time; it shows useage, you keep a small balance to available credit ratio and you maintain a history (its my oldest CC from my undergrad days).

The other tip is also to maintain a modest and unsecured LOC which you draw down on every once in a while (even if you don’t need the month) and pay it off within a week. You pay a few bucks on interest but may save your thousands if it knocks basis points off your mortgage.

by: The Financial Blogger | October 4th, 2007 (5:54 am)

Hi CR,
I find very interesting that your mortgage broker use this old method of considering your credit cards at their limit. In fact, we do not use this technique for a while where I work. The main reason why is the following: if you have a good beacon score and a decent income, you can easily get yourself 20K in new credit cards tomorrow morning. So even if you have only one or two cards when you apply for the mortgage, it does not mean you can’t get much more credit right after your mortgage approval.

Having only one card could hurt your beacon score while having three to five will improve it and should not be factored in your TDSR calculation if they do not show an outstanding balance.

TMW, the limited usage of a line of credit is another great way to improve your credit score. Unfortunately, not everyone can qualify for one.

Thx your thoughts guys!

Interesting post! I have only 3 cards maximum. 1 personal card I use, 1 backup and 1 for business. I didn’t know you are a banker! 🙂 Cool!

by: The Financial Blogger | October 6th, 2007 (7:00 am)

SVB, 3 cards is a good number. It seems that you will most likely use 2 out of 3 on a regular basis which is even better 🙂

It’s funny to be a banker because I don’t think like one. I have a more entrepreneur-marketing mind than the usual rational-straight financial thinking required in bank 😉

I’m lucky as my department requires more creativity and the usual banks!

[…] is that perhaps we improve the means where consumers can get better educated on issues like how much credit is optimal?, or even how to fight back against debt […]

[…] The Financial Blogger wrote a fantastic post today on “Improve your credit 102: How much credit is optimal?”Here’s ONLY a quick extractBuilding a strong credit score requires a lot of self discipline and a great control over your personal finance.The best way to improve your credit score is to show the financial institutions that you are able to use your available … […]

What CR is talking about is the old (and still frequently used) method for mortgages.

But, there’s a difference between mortgages and credit scores. Mortgage people want to make sure that you’re not going to incur zillions of dollars of new debt and jeopardize their huge loan to you.

But with credit scores, you want a high debt-to-credit ratio. More available credit (more cards) is good up to a point, as The Financial Blogger says. It’s just that mortgages are a different animal.

[…] I previously mentioned on this blog, it would not be a bad idea to have three to five credit cards. Credit cards are the easiest way to […]