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I'm reading Ramit Sethi's I Will Teach You To Be Rich, and one of the tips from the first chapter is to apply for more credit card debt. He warns it's only for people like me who carry no credit card debt and pay in full each month. I don't really go shopping much with my credit card, but the goal here seems to be to improve creditworthiness, specifically credit utilization rate.

I've heard other places say that large available credit can actually hurt, because lenders will assume you run out and charge it all up the moment they approve you.

So, which camp is right? Is there a happy medium, and if so, how would I know where it is?

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Mr. Sethi is 100% correct, within reason.

Open a few cards, but try to limit it to one or two per quarter.

Lenders like, in this order:

  • People who pay on time.
  • People with long histories of paying on time.
  • People who have an good credit utilization ratio.

Lots of available credit and low utilization will not hurt you from a credit point of view. But... lenders will close unutilized credit lines eventually.

  • What exactly does "paying on time" mean for a credit card? I understand the notion for anything with a clear payment plan, but credit cards do not fit in that category. – AlanSE Aug 8 '11 at 18:45
  • Paying at least the minimum balance by the due date on your billing statement is the definition of "on time" with respect to credit cards. – duffbeer703 Aug 8 '11 at 18:56
  • Be aware that one thing that is tracked on your credit report is the highest balance you've carried (at the end of a month). I have no inside info but this has seemed to affect the score a bit (the lower the better). – Nicole Aug 8 '11 at 23:21
  • hence, paying off a card completely at the end of every month is a good thing (and it saves you from paying a metric crapton of interest – Chuck van der Linden Aug 13 '11 at 0:52
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The credit to debt ratio should be 10-30%, lower might indeed suggest a possible sting intentions, higher would suggest living above your abilities. This is a speculation of course because the FICO score formula is a trade secret, but that's the conclusion I have after all the research I've done over the years (including the practical application by myself).

So the point of applying for more debt is indeed to improve the credit/debt ratio, however too many open accounts lower your score, and too many applications (credit inquires) lower your score as well (although not permanently, but for several months after the inquiry).

  • Could you clearly define the use of terms "credit" and "debt" in your answer? thanks. – AlanSE Aug 8 '11 at 18:44
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    credit is the credit limit of your revolving account as reported to the agencies, debt is the actual usage of this limit as reported (which for credit cards is the statement balance). – littleadv Aug 8 '11 at 21:18
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By doing this, you are really 'borrowing' now so you can 'borrow more' later.

If you have one $1000 card and you charge $500, then your credit utilization ratio is 50%. If you had another $1000 card though, your ratio would drop to 25% because it looks at total current debt vs total available debt. So, the more cards you have, the lower that ratio drops. And since you have $0 balances anyway and payoff your balance in full every month, it probably won't 'hurt' you.

But think about this, the more cards you have open, the more exposed you are to credit fraud. And for what gain? Do you really want to go through the hassle of trying to get that cleaned up? I've heard of Ramit's book and looked at it briefly, but I would strongly discourage having all of those open lines of credit laying around.

You will be better off in the long run with zero credit cards and a huge stack of money in the bank. Think about it. If you have $50k in the bank, you can afford to just go buy a $10k car or make a $30k down payment on a home or survive a job layoff.

I'm over in Cash Camp if you want to join.

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