Dear YOUNG MONEY,
I recently applied for a credit card and was declined. One of the reasons was either because I had too many active credit card applications or too many credit cards. I would just like to ask why is it that is bad? Isn’t the more credit cards you have the better for your credit?
You mention two distinct issues. Being turned down for having made too many credit card applications is much different than being turned down for owning too many credit card accounts, or revolving accounts, as they are called in the industry.
Applying for several credit accounts in a short span of time will actually lower a consumer’s credit score. According to Fair Isaac, creators of the credit score system, 10 percent of the credit rating is determined by the consumer’s record of inquiring (applying) for new credit. Applying for every credit card offer that comes in the mail can lower your credit score because with every application, the lender will review your credit report, and these inquiries indicate to other lenders that you are shopping for credit. And, if you are approved for some of the new accounts, the very newness of the accounts will also work against you because credit-scoring rewards people for having accounts opened for several years.
Now, the second issue you brought up; being turned down for having too many credit card accounts. One reason for the turn down is not so much the actual number of credit cards you have but the available balance.
You may have too much available credit in relation to your income. Available credit is the amount of credit you have available on all of your accounts combined. What if you decided to go on a shopping spree one day and max out all of your credit card accounts? Lenders measure what kind of a risk you would be based on your ability to repay that money when they look at your income vs. your available credit.
It’s possible you may also have too many new accounts without much good payment history. Having accounts open for at least two years with no late payments is very good for a credit rating.
You could be using too high of a percentage of your available credit. For example, if you have $5,000 in total available credit and you have charged $4,000 in purchases, then you are using 80 percent of your available balance. That is considered very high usage and will have a negative affect on your credit score and ability to qualify for new credit accounts. Everyone should work to keep their use of available credit to below 50 percent.
Also, you may not own lots of credit cards but you may have too many of the same kind of credit. Credit-scoring rewards consumers with a good mix of credit accounts, credit cards, retail accounts, installment loans, mortgages, consumer finance accounts, etc.
If you were declined for credit, you are entitled by law to receive a free copy of the credit report that was used to decline your application. I urge you to order the free report as soon as possible and review it carefully. Once you understand your credit history in more detail, you’ll have a better idea of what to do to improve your credit rating.
Mike “The DebBuster” Schiano is a nationally syndicated radio talk show host and book author. His show can be heard via the Web at www.inchargeradio.com. Send your personal finance questions to “Ask the DebtBuster” at email@example.com.
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