I am often asked, “How many credit cards I should have, can I close my credit cards, can I open a credit card, how does the balance impact my score, etc.?”

Let’s start with the appropriate number of credit cards you should have open. It is recommended to have three revolving accounts with balances, such as credit cards and/or revolving lines of credit. If you have less than three credit cards, opening a second or third credit card may improve your score. However, if you already have three open credit cards, your score may drop initially by opening a fourth credit card. Usually, it takes six-12 months to establish payment history to offset the drop in your score when you open more than three credit cards or lines of credit.

I want to emphasize this information is based on your entire credit file, so if you have multiple installment loans or derogatory credit, your scores may react differently.

There are three possible ways credit cards may be reported to the credit bureaus. The most common classification is a revolving account. This is a traditional credit card that you can make minimum payments, pay in full or a portion of the balance. Paying down balances on these cards may have in impact on your credit score. Below is a good reference to use when determining how the balance impacts your score and how much your score could increase or decrease by paying down your credit card with a high balance.

Percentage of balance to credit limit Potential Impact to credit score

10% Excellent – 10-20-point improvement

30% Good – 5-15-point improvement

50% Ok – 0-10-point improvement

80% Low – same as 100% balance

Exceeding credit limit Not Good – 10-20-point decrease

While FICO does not promote this, I typically see your best FICO score when you keep a small balance on your card vs. paying it off in full. As an example, if you have four credit cards with high balances, you may improve your score by 40-80 points by paying them down to 10-30 percent of their credit limit.

Paying down credit cards that are reported as charge card or open account may not improve your score. At the same time, having high balances on these cards will not negatively impact your score. A traditional American Express card that requires you to pay it off in full each month is a great example. One reason your score would not increase is possibly because you paid down a card that is reported as a charge card or open account.

Many people use their credit cards to earn points, etc. so they apply all their charges to one card, then pay it off at the end of the month. Typically, this does not hurt your FICO score. I recommend you contact your credit card companies and they can tell you when they report to the bureaus. When your credit report is pulled it is a snap shot of that given moment, so if your balance is high, then it could lower your score. If you plan to apply for a mortgage or car loan, I recommend you make sure your credit card balances are low when you apply for the loan.

Home lines of credit or revolving lines of credit may or may not impact your FICO scores based on your balances. The key is the size of your credit limit. Any home line of credit with a credit limit above $50,000 will be viewed as an installment loan in the FICO calculation. However, if your credit limit is below $50,000, then the balance will impact your credit score like a credit card. Again, this is the credit limit and not the balance.

Approximately 50 percent of your score is based on your payment history and the length of your payment history while 30 percent of your score is based on your credit card balances. Keeping your revolving accounts open and keeping your credit card balances below 30 percent will have the most positive impact to your score.

Jim Kaiser

Branch Manager, NMLS #1721861

Cherry Creek Mortgage Co., Inc. NMLS 3001

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