Pete D’Arruda says he has more than $300,000 in available credit, thanks to some 25 Visas, Mastercards, and individual store, airline and gas cards — about $12,000 a card.
“It’s not taboo to have a bunch of credit cards,” says Mr. D’Arruda, a personal-finance consultant who has been building his credit trove for about five years. “It’s about how you manage them.”
Mr. D’Arruda, the founding principal of Capital Financial Advisory Group in Cary, N.C., and author of three personal-finance books, is testing the more-is-better theory: The more cards and available credit one has, the better one’s score — assuming the bills are paid promptly.
With a FICO credit score in the 810 to 815 range, it’s working for him. But credit experts say it’s unnecessary and could create a financial maelstrom for those less diligent.
“For many people, they would end up with $350,000 in debt and that would not be a very good thing,” says Rod Griffin, director of public education for Experian.
Mr. D’Arruda charges everything from coffee to his office rent. He prides himself on his ability to manage all the cards and to pay promptly, avoiding a debt spiral. “I like to pay my bills on time,” he says.
In return, he has earned hundreds of thousands of miles and points, numerous discounts and freebies from stores and vacation spots, and better interest rates on insurance and car and home loans. Typically, the higher the credit score, the lower the interest rate. What’s more, his credit-card statements provide a running tally on where he’s spending his money.
He has accumulated enough points on his Disney Visa card from Chase to pay for a Disney cruise this Thanksgiving. His platinum American Express card points will cover the airfare to Orlando.
Even cards with fees aren’t a problem: Mr. D’Arruda has a Visa Black Card, a new elite card with concierge service, access to airport lounges, cash-back rewards or airfare on any airline with no blackouts. He’s assessing it for a year to see whether he’ll use the rewards programs enough to cover the $495 annual fee, but he got the fee waived to do so. “They pulled my credit score and saw that I was a good risk,” he says.
Credit scores are calculated through complicated and proprietary algorithms that differ among scoring agencies. However, there are generally three major pieces.
The most important: your bill-paying history. It accounts for as much as 35% of your total score. Pay all your bills on time. Even if it’s just the minimum payment, make sure that bill is marked paid on the designated date, or sooner.
Next, your “utilization rate,” or debt-to-available-credit ratio, counts for about 30% of your score. Mr. D’Arruda says his is usually about 10% to 15%. Creditors don’t want to see the ratio over 30% and consider it an important sign of your financial acumen and any money challenges you are facing.
“You don’t need a lot of credit cards to have a good utilization rate,” says Barry Paperno, consumer operations manager for myFICO.com, the consumer arm of credit scorer FICO. “Obtaining 25 credit cards for your score is overkill. Utilization looks at percentages more than dollars.”
If you have $300,000 in available credit and a $30,000 balance, your utilization rate is 10%; if your available credit stands at $3,000 and you owe $300, your utilization rate is the same.
Be wary of your per-card rate, too. If you have a credit card with a $5,000 limit and you charge $4,750 for a home-theater system, your utilization rate on that card may set off alarms.
“It’s a good idea to try to keep the balance on each card under 30% of the limit,” says Steven Katz, senior director of operations for credit-management company TransUnion.
Having access to credit but not using it won’t improve your score, but that doesn’t mean you have to carry a balance each month. You simply need to use the card and pay it off to maximize your credit score.
“The ideal place to be is under a 10% utilization rate but over 0%,” FICO’s Mr. Paperno says. “There needs to be some kind of recent activity” to activate a score.
Your credit mix and history contribute about 15% to your score. Creditors like to see how you handle revolving credit, or credit cards, and installment loans, like mortgages and car and student loans. They average the age of the account divided by the number of accounts.
Opening new accounts can affect about 10% of your score. “Taking on new credit has been shown to indicate a higher level of risk,” Mr. Paperno says. “People who go into default tend to have added new credit more recently than those who haven’t.”
Mr. D’Arruda says he only chooses cards that will help him with points, miles, cash back and other perks. He likes the 30% discounts he gets at Kohl’s and the special sales offered to Home Depot and Best
Buy cardholders. He likes the Capital One card because it offers double miles. He’s got an American Express card that has no limit, though he’s not willing to test what that might mean.
“This is a lesson in discipline,” he says. “When you get the credit card, it’s like free money…. It all comes down to not overspending because it’s not your money.”