How many open lines of credit should i have


What Is a Personal Line of Credit & How Do They Work?

A personal line of credit is a bank loan that closely resembles a credit card in the sense that you have a specific loan amount of money (comparable to a credit card limit) that you can use for any purpose, as needed.

The personal line of credit is unsecured, so to get one, you probably will need a credit score at or above 700 and have a good history of repaying debts in a timely fashion. Personal lines of credit are used mostly for home remodeling projects, but could help pay for a great vacation, medical bills, buying new furniture or helping a child pay for college.

Again, you can spend the money for whatever you want, in whatever small or large sums you wish, as long as you don’t exceed the approved line of credit.

As with other forms of credit, it has risks and can end up costing a good deal if not handled correctly. The advantage a line of credit has over a regular loan is that the line of credit does not have to be used for a specific purchase and no interest is charged on the unused amount.

Personal lines of credit can be used for almost anything, but failing to repay them on schedule can lead to big financial problems.

Home improvement projects are the most common use for personal LOC, but there are other situations where the interest rate and flexible repayment options make lines of credit worth considering.

  • Projects with funding challenges. Your daughter’s marriage comes at the same time the roof needs replacing. A line of credit (LOC) could meet the challenge of paying for both.
  • People with irregular incomes. You are self-employed or work on commission and the next paycheck isn’t coming for another month. Drawing from a line of credit allows you to pay your regular monthly bills until the next paycheck arrives.
  • Emergency situations. Tax bill comes the same time the credit card bills are due along with college tuition for your child. Consolidate your debt with a line of credit.
  • Overdraft protection. If you are a frequent check writer with unstable income, a LOC can serve as a backup when you need overdraft protection.
  • Business opportunity. A line of credit serves as collateral if you want to buy a business, or spark growth through advertising, marketing or participating in tradeshows.

As with all cases of borrowing, make sure you have a strategy for repaying the money with interest before you take a loan.

Personal LOCs often come with lower interest rates than credit cards, making them a much better choice for borrowing. They also offer variable access to cash instead of a lump-sum, single-purpose loan. A credit line allows you to borrow in increments, repay it and borrow again as long as the line remains open. Typically, you will be required to pay interest on borrowed balance while the line is open for borrowing, which makes it different from a conventional loan, which is repaid in fixed installments.

If you conclude that a line of credit best meets your needs, prepare your case before approaching a lender.
  • How to apply for a credit line? Personal lines of credit are unsecured, which means you don’t need to offer collateral to protect the lender if you default. That makes it different from home equity lines of credit (HELOCs), which are secured by the equity in your home. Since risk is a key facet of lending, interest on a LOC will almost certainly be higher than on a HELOC. Therefore, it’s crucial to convince the lender that you are a good risk. Never having defaulted on a loan, or not having defaulted in years, helps. Having a high credit score also demonstrates creditworthiness. You should also let the lender know about all sources of income and your savings, which can help establish you as a good risk.
  • How large a credit line should you request? The larger your credit line, the greater risk you pose to the lender. You should probably hold your requested amount to what you realistically might need to borrow, keeping in mind your income stream and ability to repay the borrowed money. Lenders will evaluate your creditworthiness using several metrics including your credit score, you loan repayment history, any business risks you might have and your income and will limit how large a line they offer.
  • What credit scores and collateral might be required. Since personal LOCs often are made based on income and credit history, having a strong credit score is crucial. Credit scores, assigned and updated by the nation’s three large credit-rating agencies, range from 300 to 850. The higher your score, the better your risk profile. Typically, you will need a prime score, no lower than 680, but each lender has its own standards. Most personal LOCs don’t require collateral, but you might be able to improve your odds of qualifying and lower your rate if you have an investment, such as a CD or savings account, with the lender that can partially secure you credit line.

Problems with Personal Lines of Credit

Though there are many attractive sides to personal lines of credit (LOC), as with every loan, there are some trouble spots to consider.

The two biggest ones are getting approved and the interest rate banks will charge.

Lines of credit are unsecured loans, and that means the bank is taking a huge risk. The bank has to be certain the borrower has a credit history that indicates he will pay back the loan. Therefore, expect everything in the customer’s credit report to be scrutinized closely.

If you have a poor credit score or history, it will be very difficult for a lending institution to extend you a LOC.

The interest rates on a line of credit are higher than mortgage or car loans because there is no collateral. The average rate in 2015 range from 9% to 15% but could be higher if the borrower’s credit score is shaky.

Another problem is that the interest rates are variable, making them subject to the whims of the marketplace. They can change from year-to-year, depending on the terms of the loan agreement.

Also, be aware that a line of credit can hurt or help your credit score, depending on how you use it. If you draw a high percentage of the amount borrowed – taking $9,000 of the $10,000 you borrowed, for example – it will hurt your credit score. Likewise, take less than 30% of your draw is considered good use and improves your credit score.

The last thing to consider with a LOC is the maintenance fees (usually annual, sometimes monthly) and repayment schedule. Read the contract closely and be sure you understand all the payment terms before agreeing to a LOC. Find out if there are prepayment penalties.

Secured vs. Unsecured Credit Lines

A secured credit line is one in which the borrower uses an asset, usually a car or home, as collateral to secure the loan. The lender can seize the asset if the borrower doesn’t repay the debt according to the terms. Creditors usually offer lower interest rates, higher spending limits and better terms on secured lines of credit.

HELOCs are a widely used form of secured credit lines. HELOCs use equity in real estate as collateral and are really second mortgages attached to credit lines. For that reason, applying for a HELOC is very similar to applying for a mortgage, Lenders will want to appraise your home, check your credit score and income and ask about your other investments and debts. The amount of equity you have in your home – essentially the dwelling’s value minus what you owe on it – will limit the size of your credit line. Because HELOCs are secured loans, a lender has collateral if you default and will typically offer interest rates that are far lower than on comparable unsecured personal LOCs.

Unsecured lines of credit require no collateral. A creditor is accepting the borrower’s word that he will repay the debt. It usually is difficult to get an unsecured LOC approved unless you are a well-established business or an individual with an excellent credit rating.

Credit cards are the most common form of unsecured lines of credit. Personal LOCs often come with lower interest rates than credit cards, though the difference might be considerable. They can offer advantages, like flexible repayment schedules, that credit cards don’t. For business owners, they offer a solution for contractors who won’t accept credit cards. Like credit cards, they can be useful for dealing with unexpected expenses or to make payments when business income is delayed.

If you don’t repay an unsecured debt, the lender may hire a debt collector or sue to try and collect money.

Open-End vs. Closed-End Lines of Credit

Open-end credit is also known as revolving credit. Credit cards are the most used form and they require the borrower to pay at least a minimum amount of the total owed each month, though it is hoped they will pay the entire amount.

Home equity lines of credit (HELOCs) are open-end lines of credit. The amount you can borrow is based on a percentage of your home’s appraised value (usually 70-80%), minus the amount that you still owe.

For example, if your home is worth $200,000, multiply that amount by 75%, which comes to $150,000. If you bought the house for $160,000 and your equity in the home is $40,000, you still owe $120,000 to your mortgage lender. Therefore, your potential line of credit will be $150,000 minus $120,000, which equals $30,000.

To determine your actual credit limit, a lender also will consider your ability to repay the loan by examining your credit history, income and other financial obligations.

Many home equity lines of credit set a time limit during which you can borrow money, and it’s usually 10 years. Once approved for a HELOC, you can borrow up to your credit limit whenever you want during that period. The interest rate will vary, based on a publicly available index, such as the prime rate or a U.S. Treasury bill rate.

You will pay interest only on the amount you borrow and as long as you make a minimum monthly payment you can pay back as much or as little as you want every month until the end of loan period, when the entire principal amount is due.

Because a HELOC is secured by your home, the interest rate can be lower than for other lines of credit. HELOCs can be tax-deductible.

However, you may have to pay certain additional costs, including the price of a home appraisal, closing costs (possibly including points, title fees and taxes) and maintenance and/or transaction fees.

Closed-end credit provides a fixed amount of money to finance a specific purpose and period. The loan may require periodic principal and interest payments, or payment of the entire principal at the end of the loan term.

Examples of closed-end credit are: most real-estate loans; car loans; appliance loans; and payday loans (small, short-term loans secured against a customer’s next wages).

The market for open-end credit is dominated by credit cards and lines of credit, but there are some lesser-known avenues available for those willing to do their research.

Overdraft protection on checking accounts is considered an open-end source of credit. When a customer writes a check and doesn’t have enough money in the account to cover it, the bank essentially “loans” him the difference to make the check good. The customer pays interest for that loan and must repay the balance in a specific time frame.

Open-end personal checking lines also are available in some banks and credit unions. The bank or credit union establishes a credit limit and deposits that in the bank for you to write check against rather than you depositing money into an account and then writing checks against that amount.

Another open-end source of credit is travel and entertainment cards, also known as T&E cards. They are most popular with people who travel frequently and use them to make dinner, golf, tennis or spa reservations and to access airport lounges and receive car rental discounts.

T&E card customers can use them to charge as much as you want during the month, but they require that you pay the balance in full at the end of the month. Late fees are applied to the account, if payment is not received on time.

Diners Club and Carte Blanche are the two most popular forms of travel and entertainment cards.

Similarities and Differences with Other Loans

A personal line of credit (LOC) has many similarities to credit cards, personal loans, a home equity line of credit (HELOC) and payday loans, but enough differences to make it a distinctive form of borrowing worth investigating when you need money quickly.

For example, it functions just like a credit card in that you can use it for almost anything, get a monthly statement showing your expenses, interest charges, amount owed and minimum payment due, but is different in that the interest rate for LOC is typically lower and the credit limit is much higher.

There are many differences between a line of credit and personal loans, the primary one being that money is disbursed on a draw as needed in a LOC while money in a personal loan is disbursed all at once. The interest rate on a LOC is variable and you only pay it on the portion of funds you use. A personal loan carries a fixed interest rate and monthly payments are made on the balance owed.

A LOC is first cousin to a HELOC in that both extend lines of credit for use as needed. However, you don’t have to put your home up as collateral with a LOC. A LOC is unsecured and thus far more favorable for the borrower. The added risk to the bank could mean higher interest rates charged for the LOC, but still, they can’t take your home.

The only similarity between a LOC and a payday loan is that in both involve a lender. A LOC is superior in every way imaginable. You can receive a far bigger loan ($3,000-$100,000 for LOC vs. $400 for average payday loan); you pay far less interest rates (8%-14% vs. 399%-521%) and repayment terms are much easier (10 years vs. two weeks).

Be sure to compare LOCs with other open-end credit options before deciding which works best for you.

How many credit cards does the average American have?


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Can you have too many credit cards? It depends.

More than one or two cards might seem excessive to some, while others may open several new credit cards each year.

The largest collection of valid credit cards recognized by the Guinness World Records is held by Walter Cavanagh of Santa Clara, Calif., who has amassed a staggering 1,497 cards.

Extreme cases like Cavanagh got us thinking: How many credit cards does the average American have?

To figure out the answer, we reached out to several credit bureaus and analyzed anonymized member data from Credit Karma’s more than 75 million members.

Why is this important? Because the number of credit cards you have — and how you use them — could impact your credit scores and finances.

Let’s first dive into our findings. Then, we’ll discuss how opening and closing accounts could affect your credit scores and whether it’s a good idea to apply for more cards. In any case, you can probably rest assured that the ideal number is below 1,497.

How many credit cards does the average American have?

Based on data from March through June 2017, Credit Karma members have an average of 4.73 credit cards. This figure includes all of Credit Karma’s members as of June 2017, including those without a single credit card.

If that seems like a lot, it certainly appears to be more than the nationwide average. According to data compiled by TransUnion from the first quarter of 2017, the average number of credit cards per person is 2.69.

Note that this figure only includes people with at least one credit card, so it can’t be compared directly with Credit Karma’s own data.

TransUnion’s public relations consultant, Colleen Kennedy, also shared with us the average number of credit cards per person by metropolitan statistical area (MSA).

As with TransUnion’s nationwide figure, this data set (pulled in the first three months of 2017) only includes people with at least one credit card. Here’s how it breaks down by metro area:

Where’s the plastic? Credit card accounts by metro area

Source: TransUnion LLC

From the looks of it, folks in New York City and Miami are more likely to open credit cards, while those living in areas like Minneapolis and Seattle may be a little more conservative when applying for new cards.

The number of credit cards you have may affect your credit.

There isn’t a magic number of credit cards you should have, although having at least one card may be a good idea if you want to build credit.

Generally, how you use the cards is more important than how many credit card accounts you have open.

Factors like your credit utilization rate (the percentage of your available credit that you use) and your payment history tend to have a more significant effect on your credit scores.

A new credit account could help your credit scores because it adds to your total available credit, which can lower your utilization rate.

It may be easier to keep your utilization rate low if you have several credit cards and can spread out your purchases across those cards.

Keep in mind, however, that certain credit score models look at your overall credit utilization and the utilization on individual credit cards.

If you’re using multiple cards responsibly and paying off the full monthly balance on time on each card, you’re also adding positive information to your payment history.

Be careful, though: If you tend to spend more than you earn, you could wind up with a lot of debt if you have access to several credit lines.

It’ll also be more difficult to keep track of all your cards, and you could end up making a late payment by mistake.

Opening and closing accounts can also have an effect.

Opening a new credit card account or closing an account can affect your credit in several ways:

When you apply for a new credit card, the issuer will likely do a hard pull on your credit (also known as a hard inquiry).

This allows the issuer to review your credit report(s) and score(s) when determining whether they’ll approve your application.

Hard inquiries aren’t a major factor in determining your credit scores, and sometimes one hard inquiry won’t have any impact.

Other times, however, a hard inquiry may lower your credit scores by several points. If this happens to you, don’t worry too much: your scores may rise back to the pre-inquiry level, or climb even higher, within a few months (as long as you’re practicing overall good credit habits).

Still, it’s a good idea to take every credit card application seriously. Frequent hard inquiries, or a hard inquiry if you have an otherwise thin file (you don’t have much credit history), could have a greater negative impact on your scores.

Closing an account could lower your utilization rate, which may lower your scores.

A closed account that doesn’t have a derogatory mark, such as a late payment, will remain on your credit reports for up to 10 years from the date of last activity.

When you close an account that has at least one derogatory mark, the account will fall off your report up to seven years from the first derogatory event (or up to 10 years for bankruptcies).

Once a closed account drops off your report, the average age of your accounts — another minor credit score factor — could decrease. Generally, the higher the average age of your accounts, the better, so this may have a negative effect on your credit.

Potential issues with having a lot of credit cards

For those who enjoy using rewards credit cards, optimizing each purchase, and keeping close track of points or miles in different programs, having multiple credit cards can be an effective way to maximize rewards and travel perks.

However, it can be hard to keep track of all those programs and card details. Even if having many credit cards doesn’t negatively impact your credit scores, it could have other financial implications if you don’t keep a careful watch over your various accounts.

Here are some questions you may want to consider before applying for multiple rewards cards:

  • Will fees eat into the value of owning multiple cards? Some people close or downgrade card accounts to avoid paying annual fees. Others find the value they get from the credit card’s benefits or rewards program is worth the fee. If you have too many cards to manage, you could wind up paying a ton in fees without making great use of the individual cards.
  • Will you be able to properly track your spending and bills? It can be easier to manage your finances if you only have a few accounts to track. Using multiple cards, you might spread your spending across accounts and be surprised by the total at the end of the month. Unless you enable auto pay, you also risk missing a payment, which can lead to a late payment fee and could negatively affect your credit. And remember – even if you set up auto pay, you still need to make sure you have enough money in the connected account when payment day rolls around.
  • Losing points or miles. When you close a rewards credit card, you could forfeit any remaining points or miles in the account. Try to use them all, or if the issuer allows it, transfer them to another card account from the same issuer. The frequent-flyer miles or hotel points you can earn with travel credit cards are typically stored within the airline or hotel rewards program connected to the card, so you probably won’t lose them if you close your card – but it’s best to check with the issuer to make sure.

When it comes to credit cards, it can be tempting to compare yourself to the average American. However, try not to overthink the statistics. The number of cards that’s best for you might not be the average number. Find a number that’s comfortable for you to manage and helps you achieve your financial goals. Whether that number is one, two or 1,497, well, we’ll leave that up to you.


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Re: How many open accounts should I have to build my credit??

Ideally you should have at least 3 revolving accounts open (credit cards) with only 1 card reporting a 1-9% balance for that card . An installment account (mortgage, auto, loan) is good for an ideal mix.

Excellent summation of the basics!

It is precisely my goal to implement this soon, as I am currently using only cash.

No change to my lifestyle or quality of life, just simple replacement of cash utilization with appropriate credit lines.

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Re: How many open accounts should I have to build my credit??

Yes, ignore that part of Credit Karma. It has a low overall impact on your score, and it's just there to show you why you don't have a perfect score. You can still have a really great score without that many old or new accounts on record.

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Re: How many open accounts should I have to build my credit??

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How many credit cards should I have?

By Thomas Muellner

Between cash back bonuses, travel offers and ultra-low introductory rates, the allure of a new credit card is a siren song few consumers can resist. But with a seemingly unending stream of offers, it’s important to understand how your use of credit affects your credit score – for good and bad – before you sign on the dotted line.

Is there an ideal number of credit cards to have for a good credit score? Is more always better?

It all depends. So, when Samuel L. Jackson, Jennifer Gardner or the next Hollywood spokesperson pitches you during the big game this weekend, keep this advice in mind.

Before you consider applying for a new credit card, realize that the average indebted American household carries upwards of $16,000 in credit card debt. It’s a staggering figure that proves it’s not always as easy as it looks to manage credit responsibly – so exercise caution. Know your limits and make a plan if you feel you’ve gotten off track.

Risks aside, credit cards can be an important resource. They’re a vital building block in establishing a positive credit history, as well as a major convenience when unexpected expenses arise. Perhaps most importantly, without a track record of credit card usage, you may be at a disadvantage when it comes time to apply for a car loan or mortgage.

“Not only are credit cards a smart way to earn rewards and be prepared for emergencies, they’re an important stepping stone for the future,” shared Michelle Goeppner, who manages Alliant’s credit card portfolio. “By using credit responsibly over time, you can show lenders you’re serious about your financial health and set yourself up for success when financing major purchases down the road.”

Though the prospect of opening a new credit card can be intimidating, it’s fiscally wise to have at least one active credit card, at the bare minimum, and to keep it open. Borrowers want to see you’re able to pay your bill on time and responsibly manage your credit card payments over the long haul; they connect your ability to pay your monthly credit card bill to your ability to pay a monthly mortgage.

In many cases, having active accounts that are fewer than five years old can be a knock against your credit score, so be wary of closing old accounts or letting cards go dormant due to inactivity.

If you’re nervous about sinking into debt, consider using a credit card on a small, reoccurring expense, like a gym membership or Netflix account, and then paying the entire balance automatically each month. Doing so will help you establish credit history while minimizing anxiety about overspending.

If one credit card is good, two or three must be even better, right?

Along with payment history, one of the most important factors in determining your credit score is credit utilization – how much credit you’re using compared to the total amount of credit available to you.

Maintaining multiple credit cards can effectively raise the ceiling on your available credit, thus lowering your utilization rate. This can be a savvy tactic to improve your credit score as long as you don’t drastically increase spending.

For example, if you have a single credit card with a limit of $2,000 and you owe a balance of $1,000, your utilization rate is 50 percent, which may put you at risk with lenders.

Conversely, if you have two credit cards, each with a $2,000 limit, and you owe a total of $1,000, your balance remains the same but your utilization rate drops to 25 percent.

As a rule of thumb, it’s best to keep balances to less than 30 percent of your total available credit and pay debts off as quickly as possible. Interest can add up over time, especially if you’re juggling several cards at once, so only open new accounts if you’re sure you can handle the extra responsibility.

While there’s technically no penalty for having multiple active credit cards (seriously, the Guinness World Record holder has nearly 1,500), new applications often require a hard pull on your credit history, which does impact your credit score.

Because of this, applying for several new credit cards at once or promptly opening and closing accounts can be a major red flag for lenders. If you have good credit and want to take advantage of new offers, pace yourself while keeping existing accounts in good standing.

Hard pulls roll off your credit report after two years, so if you do it right, there’s little harm in applying for new plastic. But once you get your new card, keep it active; having open lines of credit, including store cards, that you don’t use can hurt your credit score.

What’s more, having cards from a variety of issuers like Visa and Discover or MasterCard and American Express, helps ensure you’re covered if a business only accepts a limited number of credit card types. It also lets you reel in a variety of different offers, ranging from miles to cash back.

Ultimately, there’s no universal right number of credit cards; it varies for each person.

The key is to be responsible with your purchases and payments, understanding the factors that affect your credit and monitoring them regularly. Whether you’re comfortable maintaining a dozen cards or just one or two, you can use credit to show lenders you’re the real deal and build up your financial persona. You might even earn some fun credit card rewards in the process.

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