How Many Lines of Credit Is Too Many?

A line of credit offers a flexible approach to borrowing, providing access to funds as needed rather than a single lump sum. This financial tool functions as revolving credit, meaning that as funds are repaid, they become available for use again, similar to a credit card. It stands as a continuous source of accessible money, allowing individuals to draw, repay, and redraw funds up to a predetermined limit.

What a Line of Credit Entails

A line of credit differs from a traditional installment loan, which provides a fixed amount of money upfront that is then repaid in regular, set installments over a specific period. With a line of credit, borrowers are approved for a maximum borrowing limit, but they only incur interest on the amount actually drawn from that limit. As the borrowed funds are repaid, the available credit replenishes, allowing for repeated access without reapplying for new credit each time.

Common types of lines of credit include personal lines of credit, home equity lines of credit (HELOCs), and small business lines of credit. Personal lines of credit are typically unsecured, meaning they do not require collateral, and can be used for various personal expenses. HELOCs are secured by the equity in a homeowner’s property, often offering lower interest rates due to the collateral involved. Small business lines of credit provide flexible funding for operational costs or inventory, and can be either secured or unsecured by business assets.

How Lines of Credit Influence Your Credit Profile

Lines of credit influence a credit profile through several factors that determine credit scores.

Credit Utilization

Credit utilization accounts for approximately 30% of a FICO Score. This ratio compares the amount of credit used against the total available revolving credit. Maintaining low utilization, ideally below 30% across all revolving accounts, is advised for a positive credit score. High utilization indicates financial strain and negatively impacts a score.

Payment History

Payment history holds the greatest weight in credit scoring models, typically accounting for 35% of a FICO Score and up to 40% for some VantageScore models. Consistently making on-time payments across all lines of credit is important for building a strong credit score. Even a single late payment, especially if 30 days or more overdue, can harm a score and remain on a credit report for up to seven years.

Length of Credit History

The length of credit history makes up about 15% of a FICO Score. This factor considers the age of the oldest account, the newest account, and the average age of all accounts. A longer history of responsibly managing credit benefits a score. Opening new lines of credit can temporarily reduce the average age of accounts, potentially causing a slight dip.

Credit Mix

Credit mix, which evaluates the diversity of credit types, contributes around 10% to a FICO Score. Having a blend of revolving credit, like lines of credit, and installment credit, such as mortgages or auto loans, shows a lender the ability to manage different financial products responsibly. Opening new accounts solely to improve credit mix is generally not recommended, as its impact is less significant than other factors.

New Credit

New credit, represented by recent applications and newly opened accounts, impacts credit scores. Each time an application for a new line of credit is submitted, a hard inquiry is typically made on the credit report, which can cause a small, temporary dip. Multiple inquiries in a short period can raise concerns for lenders, signaling increased risk. Hard inquiries remain on a credit report for two years, though their impact typically fades after 12 months.

Debt-to-Income (DTI) Ratio

The debt-to-income (DTI) ratio, while not a direct component of a credit score, is a consideration for lenders. This ratio compares monthly debt payments to gross monthly income. While lines of credit offer available credit that may not be fully utilized, the total potential debt from multiple high-limit lines can influence a lender’s perception of an applicant’s ability to take on additional obligations. A high DTI, even with unused credit, can make it challenging to secure new loans or lines of credit, as it suggests a higher risk of overextension.

Indicators of an Unmanageable Number

Determining an unmanageable number of lines of credit involves evaluating several indicators of financial strain.

• Struggling to consistently make minimum payments across multiple lines suggests income may not cover debt obligations, leading to late fees and negative credit report entries.
• Relying on one line of credit to pay off another indicates a debt cycle.
• Consistently high credit utilization across most or all lines, with balances frequently approaching or exceeding 30% of available limits, signals heavy reliance on borrowed funds. This impacts credit scores and leaves little room for unexpected expenses.
• A noticeable and sustained decline in credit score often reflects issues like high utilization or late payments.
• Feeling overwhelmed or stressed by managing multiple credit accounts is a sign. The mental burden of juggling due dates, interest rates, and balances can lead to errors and missed payments.
• A high debt-to-income ratio due to aggregate available credit limits can be problematic, even if not fully utilized. Lenders may view substantial unused credit as a future liability, impacting eligibility for new financing.
• Using lines of credit for non-essential spending, such as discretionary purchases rather than emergencies, suggests a lack of financial discipline and over-reliance on borrowed money.

Strategies for Handling Multiple Lines of Credit

For individuals managing multiple lines of credit, implementing financial strategies leads to better control and improved financial health.

Budgeting and Monitoring

Establish a detailed budget to track income and expenses across all accounts. This provides a clear understanding of cash flow and identifies areas where spending can be reduced for debt repayment. Consistently monitor statements for each line of credit to catch errors and stay aware of balances and due dates.

Prioritizing Payments

When faced with multiple debts, prioritizing payments can accelerate repayment. Two common strategies are the debt avalanche and debt snowball methods. The debt avalanche method focuses on paying off accounts with the highest interest rates first, saving money by reducing total interest paid. The debt snowball method prioritizes paying off the smallest balances first, providing psychological wins that motivate progress.

Debt Consolidation

Consolidating debt simplifies management by combining multiple balances into a single loan or line of credit, often with a lower interest rate or a more manageable payment schedule. For example, a personal loan can pay off several high-interest lines of credit, resulting in one fixed monthly payment. This reduces the number of accounts to track and potentially lowers overall interest costs.

Strategic Account Management

Carefully consider whether to keep unused lines open or close them. Keeping older, unused lines open can benefit credit scores by contributing to a longer average length of credit history and increasing total available credit, which helps maintain a low credit utilization ratio. Closing accounts might reduce the temptation to spend and simplify financial oversight. If closing an account, it is generally better to close newer accounts first to minimize the impact on the average age of accounts.

Seeking Professional Advice

If managing multiple lines of credit becomes overwhelming, seeking professional advice from a certified credit counselor can provide guidance. Non-profit credit counseling agencies offer services such as budgeting assistance, debt management plans, and financial education. Counselors can help assess the financial situation, develop a personalized plan, and work with creditors to negotiate terms.