A big part of realizing good credit has to do with successfully navigating the particulars associated with the credit system. One of those “particulars” is the matter of having enough open lines of credit. A lot of folks don’t realize that having enough credit can be almost as important as meeting your obligations on time – this can be an especially big issue for young adults starting out, especially if they are living at home while they begin to make their way in the world; in situations like that, it’s not unusual for those young people to have no lease, no utility bill in their names, maybe not even a car loan in their names at that point. If all you have is one credit card account, for example, that’s not going to be enough to get your score where you want it to be in order to secure the best deals whenever you do apply for credit on behalf of the biggest of “big ticket” items, like an expensive car or a house.
While there is no science behind the right amount of open credit to maintain, a superior profile might consist of 1-2 lines of installment credit (e.g., home loan, car loan, school loan) and 2-3 lines of revolving credit (like a credit card). If your profile does not look like that, you might start by picking up additional lines of revolving credit – the easiest way to do this is by simply applying for another credit card or two. Note, however, that want to open these new lines purely in order to establish additional open credit, not to actually use the cards to any great degree. Remember how important debt utilization…the amount of your available credit you’re actually using…is to your scores, as well. The best credit profiles have a debt utilization ratio of about 8 percent, meaning, those people are using only about 8 percent of their available credit on credit cards and other open lines of credit.
As for maintaining the ideal number of lines of installment credit, that can be a little trickier, only because most people don’t really think in terms of accessing installment-type credit unless they are specifically in need of a home loan, car loan, that sort of thing. That said, with what good-but-not-great credit you likely already have with just one or two performing credit lines, you should be able to qualify for a small, personal unsecured loan at your bank or credit union, and opening that line should help your scores, as well.
Of course, as one regularly participates in the credit system as a consumer, this issue tends to take care of itself, but if you’ve not long been a participant in that system, or are someone who eschews, as much as possible, the use of credit, then this is an issue of which to remain mindful.
Speaking of length in time in the credit system, the longer a person is in it…with enough open lines, solid repayment history, and good debt utilization…that "aging" will reflect well in his scores, too. There is nothing you can do to artificially age your time in the credit system – you just have to be in it.
Credit is a funny thing, and, as more people are learning, it is something that must be actively managed, not entirely unlike an investment portfolio – who would have thought? It’s worth putting in the time to do it, though, considering how important one’s score is to accessing so much in life, including preferred insurance rates, and even good jobs. As the weight of one’s score continues to grow, in terms of its impact on “quality of life,” so, too, should your good stewardship of credit grow and improve.
The information contained here is for general information purposes only. The Financial Writer blog and Bob Yetman disclaim responsibility for any liability or loss incurred as a consequence of the use or application, either directly or indirectly, of any information presented herein. Nothing contained in this article, or any other article featured at this blog, should be construed as a solicitation or recommendation to engage in any financial transaction. You should seek the advice of a qualified professional before making any changes to your personal financial profile.