Managing your credit properly can be a delicate balancing act. While many people have experienced the pain of having too little credit, others face the opposite issue - too much credit. In this article, we'll explore both extremes and offer actionable steps to take if you find yourself in either situation.
The Conundrum of Building Credit
When you're building your credit history from scratch, getting your foot in the door can pose a challenge. Without an established credit history and decent credit score, it's hard to find someone to lend you the credit you need to begin building your score.
But how can you build a credit history when no one will allow you to prove your creditworthiness?
Also, millions of people who prefer to use cash or debit face this same issue.
The consequences of not having credit can be far-reaching. Imagine not getting that dream home or apartment because your credit score isn't high enough. Some employers also check your credit score before they will hire you.
Many people feel forced to turn to dangerous financial instruments like payday loans and title loans to make ends meet, which could put them in an even worse financial situation.
Too Little Credit: Meet Too Much Credit
And then there's the other side of the credit spectrum: consumers with, dare I say, too much credit. While it may not seem like an issue, as having a high overall credit limit can help keep your utilization rate low, having a ton of credit can cause its own set of challenges. Of course, it really depends on how that credit is being used.
Two aspects that typically factor into your score - recent behavior and the length of your credit history - could cause your score to go down if you're not careful.
If you add new credit accounts too often, your short average credit length and number of new accounts could have a negative impact on your credit score and overall credit health.
In addition, each time you apply for a new credit card or loan, the three major national credit reporting agencies - Experian, Equifax and TransUnion - could make a notation on your credit report, which is referred to as a hard inquiry.
Hard inquiries can cause your score to drop, as applying for too much credit at one time could indicate that you're desperate for credit or that you aren't able to qualify for the credit you need. In the eyes of lenders, neither one of those scenarios makes you the ideal customer.
The Importance of Knowing Your Credit Score
Whether you have too much credit or a woefully thin credit file to deal with, your first step toward managing your credit properly should be the same -- check your credit score (if you have one) and become familiar with the information on your reports to identify the areas in your credit history that need the most work.
We at Credit Karma can help on this front; sign up today and you can receive your credit reports and scores from two of the three main credit bureaus.
How to Overcome Too Little Credit
The second step can vary, depending on which end of the spectrum you fall on. If you're just starting out on your credit journey, you may want to begin by getting some form of credit.
Instead of applying for that exclusive rewards card or mortgage, you can start small by looking into a revolving personal loan with a bank or credit union you already have a relationship with, or a secured credit card, which is a type of card that requires an initial deposit to help reduce the risk for the issuer. Although secured cards usually have higher fees and more hoops to jump through, they're often easier to qualify for and can help you accomplish your goal of building an initial credit history.
Once you're granted a line of credit, it's up to you to make the most of it. Simple steps like paying your bill on time and keeping a low credit utilization rate can go a long way toward building your credit. Since secured cards and loans are typically reported to the credit bureaus, you'll want to make sure you put your best foot forward to get your credit history off to a good start.
How to Approach Too Much Credit
If you have too much credit, on the other hand, it might be time to slow things down. Instead of constantly applying for new accounts, try to properly use the ones you have. Dozens of cards and a billion dollars in open credit might not do much to improve your financial situation - especially if you're carrying a load of debt.
So instead of adding to the pile, consider focusing on taking actionable steps to make the most of the credit you already have. Pay down your debts, pay your bills in full (and on time) and stay the course.
And remember: no matter what you've heard, closing old accounts isn't always the answer. In fact, keeping those old accounts open - even with a zero balance- could help maintain your good credit by increasing the average age of your accounts. If you make all of these moves, your hard work could eventually pay off.
Too little credit is a problem we've all dealt with at one point in our lives, but taking on a lot of credit may not be the answer. Strive to find a happy medium, and above all, treat your credit with the utmost respect and care.
Because one day, you might really need it.
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