Can you have too much available credit?

Quick insights

• While too much credit may be a luxury few people get to enjoy, it can end up being a drawback if you utilize too much of your available credit.
• If possible, you should strive to keep your credit utilization ratio under 30%.
• A high credit limit combined with low credit utilization and a history of on-time payments can help you to improve your credit score.

The basics: Understanding credit limits, credit utilization ratio and credit score

Your total credit limit and credit utilization ratio both contribute to your credit score. These financial terms are each important to understand, so we’ll start by taking a moment to explore these three concepts in greater detail.

Credit limit

Your total credit limit refers to the total amount of credit available to you. For instance, if you currently have three credit cards, each with a limit of $1,000, your total credit limit is $3,000. You can increase your total credit limit by opening additional lines of credit or by requesting a credit limit increase. Please note that if you apply for a new line of credit, a hard inquiry will be conducted and will temporarily lower your credit score.

Credit utilization ratio

Credit utilization ratio refers to the percentage of credit that you are currently using against your total available credit. For instance, if you have a credit limit of $5,000 and hold a balance of $1,500, you have a credit utilization of 30%.

• Approximately 20-30% of your credit score is determined by credit utilization.
• Using less than 20-30% of your available credit is considered ideal utilization.

Credit score

A credit score is a three-digit number between 300 and 850 that represents your financial behavior and creditworthiness. Numerous factors contribute to this ever-changing score, including payment history, the age of your lines of credit, credit utilization ratio and more. Your credit history is compiled by each of the three major credit bureaus: Experian™, Equifax® and TransUnion®. They then share this data with VantageScore® and FICO®, who calculate your credit score.

Breakdown of credit score calculation

While the specific details can be a little harder to pin down, VantageScore and FICO provide some insight into how they calculate your score.

VantageScore

Your VantageScore3.0 credit score is comprised of the following six categories:

• Payment history (40%): Your history of making required payments on time and in full
• Depth of credit (21%): The term VanatgeScore uses to measure both the age and type of your credit accounts, including revolving accounts like credit cards and installment debt like mortgages
• Credit utilization (20%): Your total amount of debt relative to your total amount of available credit
• Balances (11%): Total remaining balances, both current and delinquent
• Recent credit (5%): How many new lines of credit you recently opened and how many recent hard inquiries were conducted by lenders
• Available credit (3%): How much credit is available to you across all revolving accounts

FICO

Your FICO credit score is comprised of the following five categories:

• Payment history (35%): Your history of making required payments on time and in full
• Credit utilization (30%): Your total amount of debt relative to your total amount of available credit
• Length of credit history (15%): How long you have had your various lines of credit open
• New credit accounts (10%): How many new lines of credit you opened recently
• Types of credit (10%): Also known as credit mix, this is the breakdown of the distinct types of credit and debt you hold.

Advantages and disadvantages of having a high credit limit

While the benefits of a high credit limit might seem more obvious, there can be some drawbacks as well. Let’s explore the pros and cons below.

Advantages

When accompanied by healthy financial habits, a higher credit limit might benefit you in the following ways:

• Enjoy higher purchasing power
• The possibility of maintaining a lower credit utilization ratio
• Useful in an emergency or when you need to make an unexpected purchase

Disadvantages

That said, a high credit limit can lead to the following disadvantages:

• Increased debt: If you are not financially responsible, increased purchasing power and increased credit limit could increase the possibility of going into greater debt. You may even make purchases you couldn’t otherwise afford. You are still financially responsible for your credit card balance, so it’s important to stick to the budget you have.
• Credit score: There is a short-term negative impact on your credit score with every hard inquiry for new credit. Also, if you increase your debt due to your credit limit increase but start to miss payments, these actions could result in a negative impact to your credit score.

How much available credit should I have?

There’s not a one-size-fits-all answer to that question, but generally you should strive for a total credit limit that is much higher than your average monthly expenses. This can help keep your credit utilization ratio below 30%, which can positively impact your credit score.

The bottom line

A high credit limit might be a great way to help improve your credit score by decreasing your credit utilization. Additional benefits may include increased purchasing power and a safeguard in case of emergencies. While a high credit limit is generally seen as beneficial, it’s important not to see this as an excuse to overspend and accumulate more debt, as this could have a net negative impact on your credit score and financial health.