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Contributor Blog: Credit Confusion? I'm Here to Help

I become very confused about the exact ratio of credit cards and FICO scores.
-How many cards of all different kinds should one have? Can you be really specific?
-How many cards should I keep open or closed if not active?
-How do I close the accounts that need to be, if so?
-Do you need to be really wealthy to have a 800+ score? --Tracey

Hello Tracey. Those are some excellent questions. I’ll answer each one individually.

How many cards of all different kinds should one have? Can you be really specific?

You should have enough credit cards so that you can function efficiently. I am not a believer in the “1 card” strategy. It doesn’t leave with enough options and with one large purchase you will lower your credit scores. You shouldn’t feel the need to have a credit card with all retailers that you frequent. That’s dangerous too because their credit limits are typically very low and their interest rates are typically very high, not a good combination. Here’s MY strategy…I’d suggest you try it.

I have 6 credit cards, all open and all in good standing. The combined credit limits on all of my cards is $94,000. That gives me significant buying power and “other” options should one of my card companies start treating me poorly. It also insures me against what’s called a “usage spike.” I don’t ever want you to use more than 10% of your credit limits. For me 10% is $9,400. And while I don’t typically ever have credit card debt that high, you never know what’s going to happen. Of course it takes time to earn the very high credit limits you’ll need for this strategy. Another note: I never, ever revolving a balance. I always pay in full each month. As such, I don’t know and I don’t care what my interest rates are. If you’re interested in shopping around and comparing various credit card offers then you can do so at credit.com.

How many cards should I keep open or closed if not active?

How do I close the accounts that need to be, if so?

Can I talk you out of closing your credit card accounts? You have essentially no liability if the card is stolen, and it helps your credit scores if you leave them open. If I absolutely can’t talk you out of this then close the one with the lowest credit limit. I just need you to know that you could be hurting your credit scores by doing this. And in today’s credit environment we all need as many points as possible.

Do you need to be really wealthy to have a 800+ score?

Absolutely not. In fact, your income, net worth, assets, and holdings have nothing to do with your credit scores. Income, and those other things, are a measurement of your capacity. Capacity, in the lending world, is simply your ability to pay a bill. In other words, do you make enough money to afford the payment on a new car loan or some other loan?

Credit scores are a measurement of credit worthiness, not capacity. This is why mortgage lenders want you to provide a copy of your bank statements, W2s, tax returns, and pay stubs. They want to measure your ability to make the payment. They’ll pull your credit reports and scores to measure your credit worthiness.

I’ve got many friends who make a lot of money who have poor credit scores. I’ve also got a lot of friends who are unemployed, either by choice or not, and have scores in the 700s and 800s. Some of the worst scores I’ve ever seen belong to doctors, lawyers, and professional athletes.

[John Ulzheimer is a nationally recognized credit expert and contributor to On the Money. Learn more at Credit.com or JohnUlzheimer.com]