How Much Available Credit Should I Have?

Adam Levy, The Motley Fool

One of the biggest factors impacting your credit score is your available credit. But agencies like FICO (also known as Fair Isaac Corp. (NYSE:FICO)) don’t just look at your available credit on its own; they look at what percentage of your available credit you actually use. That’s called your credit utilization ratio, and it accounts for 30% of your credit score.

The ideal credit utilization ratio isn’t 0%, though. Creditors want to see that you can use your credit limit responsibly, not avoid using it entirely. Still, the lower the better.

So, the amount of available credit you should have is really a function of how much you plan to spend on your credit cards in the average month.

The easy way to figure out how much available credit you should have

The average user of a credit card spends between $639 and $843 per month. That is, unless that user has an American Express card, which apparently attracts big spenders: An Amex holder spends an average of $1687 per month.

But you’re not an average person. You have your own particular spending habits. Thankfully, if you already have a credit card, a nice record of the amount you spend on it every month is provided for you. You can usually find an archive of all your monthly statements when you log into your issuer’s website.

Here’s an easy way to figure out how much available credit you should have to maintain a good credit score:

1. Go through the last 12 months of credit card statements and find the biggest bill you received.

2. Multiply that number by five.

3. There’s no step three.

Unless you expect significant changes in your spending, you’ll never go well above 20% credit utilization with the amount you just calculated. Anthony Sprauve, spokesperson for FICO subsidiary myFICO.com, said, “I think that if people stay somewhere between 10 and 20 percent range, that’s a good place to be.”

Two ways to increase your credit limit

If you found that you’re using a lot more than 20% of your available credit on a regular basis, there are two options to help reduce the percentage of your credit limit you use.

The first option is easy: Call up your issuer and ask for a credit limit increase. This usually results in a credit inquiry to determine your creditworthiness. If you pay your bill off on time and in full every month or recently received a significant raise, the issuer may feel comfortable raising your credit limit.

The other option isn’t as easy, but it can be a lot more lucrative: Sign up for a new credit card. If you’re going to take another credit inquiry anyway (which negatively impacts your credit score in the short term), you might as well get something for it. When you apply for a new credit card, you can usually get a good sign-up bonus. At the very least, you can find a card that aligns better with your spending habits or complements your current credit card.

The less fun way to improve your credit score

Let’s say you’re applying for a major loan in the near future, and you want to improve your credit score fast. Another credit inquiry could put a small ding in your score in the short term, temporarily negating the impact of a lower credit utilization ratio.

If you’d rather not put another inquiry on your credit report, you have a couple more options to reduce your credit utilization ratio below 20%.

You can simply spend less on your credit card, and use cash or a debit card for more transactions. This strategy has its drawbacks, though. You no longer receive all the benefits of using your credit card.

A better, but slightly more complicated option, is to pay off your credit card before it reports the balance to the credit bureaus. Simply call up and ask which day of the month the issuer reports your balance, and then ensure you pay off enough of the balance (but not all of it) to get to your target utilization ratio. What percentage you aim for is up to you, but between 1% and 10% is usually best.

Can your credit limit be too high?

The only instance where your credit limit can be too high is if you regularly max out your credit cards and get yourself into financial trouble. If that’s the case, stop using your credit card, start tracking your spending, and make a budget.

As long as you’re using credit responsibly, there’s no such thing as having too much available credit or too many credit cards. The lower your credit utilization percentage, the better. “High achievers — those with a score north of 750 — they’re using an average of 7 percent of their available credit,” Sprauve said.

Since credit utilization accounts for a large percentage of your credit score, it’s in your best interest to maximize your available credit, as long as you don’t let it change your spending habits. Credit cards are a tool to help you make the most of your finances. Having a lot of available credit, but not using most of it, could save you a lot of money when it comes time to take out a major loan.