topic Re: Ideal credit limit in General Credit Topics

Ideal credit limit

Fernando1 — Sun, 18 Dec 2022 14:28:29 GMT

Is there an ideal total credit limit proportional to one's income?

For instance, if someone has income of 100.000, what would it be his ideal total credit limit to maximize his credit score?

Re: Ideal credit limit

Horseshoez — Sun, 18 Dec 2022 14:46:40 GMT

@Fernando1 wrote:
Is there an ideal total credit limit proportional to one's income?

For instance, if someone has income of 100.000, what would it be his ideal total credit limit to maximize his credit score?

I don't believe there is such a thing. I've seen folks with credit limits two and three times their annual gross with credit scores up in the 800s, and other folks who have credit limits which are a tiny fraction of their annual income also up in the 800s. In my case, all of my scores are up in the 800s and if I were to interpolate the $100,000 annual income you referenced above to mine, I'd have a credit limit of about $9,500.

Re: Ideal credit limit

Remedios — Sun, 18 Dec 2022 15:42:40 GMT

Income is not included into scoring calculations, so no such animal.

Re: Ideal credit limit

mgood — Sun, 18 Dec 2022 16:03:03 GMT

I don't think there's a certain dollar amount you need for good scores. But you do need to keep you utilization low for good scores. Utilization is how much you owe divided by how much credit you have available.

If you have one credit card with a $1k limit and you owe $800, that's 80% utilization. That's very bad.

If you have several cards with a combined limit of $10k, and you owe $800, that's 8% utilization. That's very good.

You still owe the same 800 bucks, but it's viewed differently depending on how much credit you have available.

A few years ago, I had less than $15k credit limit on all my cards combined. I was carrying some debt on there too, even though I knew I shouldn't. Then I had to buy a $4k transmission for my pickup and pay $1k at the dentist. That's $5k of unexpected expenses I had to add to my credit card debt that was already too high. My utilization got up around 77% and my scores stunk.

You improve your utilization by paying down the debt, obviously, but also by increasing the available credit through credit limit increases on existing cards as well as by opening new cards. My aggregate credit limit is much higher now, about 1.5x my annual income. I feel pretty comfortable there. If I had $5k-$10k of unexpected expenses pop up, I could handle it. For one thing, I'm sure I could get a bank loan to cover that and not have to carry it on credit cards. But if I did need to put it on my credit cards, it would not be too big of a deal. My scores would still be decent.

So it's not about how much credit you need for good scores. It's how much cushion do you need "just in case" so you can cover whatever comes up without it destroying your credit scores.

Re: Ideal credit limit

mgood — Sun, 18 Dec 2022 15:55:50 GMT

How do I delete my post?
My response here was not relevant to the original question.

Re: Ideal credit limit

SouthJamaica — Sun, 18 Dec 2022 16:09:11 GMT

@Fernando1 wrote:
Is there an ideal total credit limit proportional to one's income?

For instance, if someone has income of 100.000, what would it be his ideal total credit limit to maximize his credit score?

No there isn't. But I have run into a couple of credit unions who will deny credit on the ground that one has too much available credit. When a credit union tells me that, I dump them, because I have no interest in having less available credit.

Re: Ideal credit limit

GZG — Sun, 18 Dec 2022 16:50:12 GMT

@Fernando1 wrote:
Is there an ideal total credit limit proportional to one's income?

For instance, if someone has income of 100.000, what would it be his ideal total credit limit to maximize his credit score?

if your maximum spend on any credit card you have 30% of that card's credit limit, you'll incur less temporary credit score penalties (which go away once you pay your bill) if you don't want to make payments on your cards throughout the cycle as opposed to on the due date or after the statement has published.

Getting a ton of arbitrary credit you never plan to use might be annoying and might spook a few creditors, particularly when your income isn't "infinite".

There's no FICO mechanism, as @SouthJamaica said for total credit limit itself causing an impact to scores. Keeping per card and total overall utilization low is important, but you can ensure that by early paydowns as opposed to getting more credit.

There's also the human element: what are you going to do when given access to X amount of credit?

If you can't personally trust yourself with that much money/responsibility because an 800 credit score allowed you to get 200k in credit, don't get that credit, it's not going to hurt your credit score for not getting a lot of credit.

Re: Ideal credit limit

Thomas_Thumb — Sun, 18 Dec 2022 17:17:06 GMT

@Fernando1 wrote:
Is there an ideal total credit limit proportional to one's income?

For instance, if someone has income of 100.000, what would it be his ideal total credit limit to maximize his credit score?

No there is not. That being said, a total revolving credit limit in the 0.4x to 1.0x annual income is a rule of thumb I often recommend. Maximum scores can be achieved with quite low total CLs. However, having low total limits may require micromanaging credit card payments to ensure reported utilizations are low.

I am not willing to micromanage, so I have a total CL around the 1.0x level. That allows me to have charges post on statements and just pay statement balances before due date - while maintaining low reported utilizations.

Re: Ideal credit limit

markbeiser — Sun, 18 Dec 2022 17:07:54 GMT

As others have said, some lenders look at your total available credit vs. income when making a decision to extend credit, or set your limit, etc., but it isn't part of any scoring model.

There are a few lenders that shy away from extending more credit accross all accounts with their institution than a certain percentage or multiple of your annual income, but don't factor in your available credit with other institutions.
With some, you may have to verify your income if you are asking for high credit limits.

Re: Ideal credit limit

Horseshoez — Sun, 18 Dec 2022 17:44:44 GMT

@GZG wrote:
If you can't personally trust yourself with that much money/responsibility because an 800 credit score allowed you to get 200k in credit, don't get that credit, it's not going to hurt your credit score for not getting a lot of credit.

I've been approved for 5 credit cards since my Chapter 13 was discharged nearly 3 years ago, the first was a low limit secured card and has been long since closed. Of the remaining four, the first three were applied for within the first 14 months following my discharge, where my FICO scores ranged from just above 600 to a high of just over 700, the final card was applied for after my Chapter 13 fell off my credit reports which pushed all of my scores to 820 and above. Guess which card has the lowest limit? The last one; I was only approved for a $2,000 limit. Go figure.

Re: Ideal credit limit

Horseshoez — Sun, 18 Dec 2022 17:47:50 GMT

@Thomas_Thumb wrote:
@Fernando1 wrote:
That being said, a total revolving credit limit in the 0.4x to 1.0x annual income is a rule of thumb I often recommend. Maximum scores can be achieved with quite low total CLs.

Really? Yikes, I'm definitely doing something wrong, my revolving credit limit is 0.095x of my annual income, and even that is waaaay more than I need.

Re: Ideal credit limit

Kforce — Sun, 18 Dec 2022 19:12:16 GMT

@Thomas_Thumb wrote:
No there is not. That being said, a total revolving credit limit in the 0.4x to 1.0x annual income is a rule of thumb I often recommend.

I like this answer because I am at 0.7x

The answer to this question is best answered by another question,

How many pair of shoes should a woman have ?

Re: Ideal credit limit

mgood — Sun, 18 Dec 2022 19:30:28 GMT

@Kforce wrote:
The answer to this question is best answered by another question,
How many pair of shoes should a woman have ?

How many guitars, guns, whatever you're into does a guy need? And I'm sure it can apply to credit cards in this crowd.
The answer is always "one more."

Re: Ideal credit limit

Thomas_Thumb — Sun, 18 Dec 2022 20:06:04 GMT

@Horseshoez wrote:
@Thomas_Thumb wrote:
@Fernando1 wrote:
That being said, a total revolving credit limit in the 0.4x to 1.0x annual income is a rule of thumb I often recommend. Maximum scores can be achieved with quite low total CLs.
Really? Yikes, I'm definitely doing something wrong, my revolving credit limit is 0.095x of my annual income, and even that is waaaay more than I need.

The OP was not asking about need. The question was about maximizing score. Sure, it is possible to maximize score with minimal CL. However, if someone wants to flow most expenses thru cards for cashback & other rewards, then higher CLs make that easier.

Here is how I came to my rule of thumb - for a $100k upper middle income salary.

1) Let's say 75% of yearly gross income goes toward yearly expenses and taxes. Of the remainder 15% is savings and the remaining 10% is other. Let's then say 80% of the expenses flow thru credit cards and all credit card bills are paid in full each month.

2) Average monthly expenses on credit cards would then be (.75x.80)/12 = .05 (5.0%) yearly income.

3) Credit card balances are PIF each month once - as shown on monthly statements.

4) For best FICO score reported aggregate revolving utilization should be maintained under 9% and preferrably under 5%.

* Note 5% = 0.05 in decimal form

What should my aggregate revolving credit limit be to maintain 5% utilization in an average month?

a) Want: (Avg monthly credit card expenditures)/(total aggregate credit card CL) = 5%

=> (0.05 yearly income)/(total aggregate credit card CL) = 5% (or 0.05)

b) Multiplying both sides by total credit card limit yields: (0.05 yearly income) = 0.05 (total aggregate credit card CL)

c) Multiplying both sides of the equation by 20 gives: Yearly income = total credit card CL.

- Limiting total credit card CL to 10% of yearly income could work. However, for optimal scores, that requires some micromanaging of payment schedules. Thus, the 0.4x to 1.0x income rule of thumb. In both cases (0.1x and 1.0x) total monthly CC expenses were the same - it just a difference how payments are made.

The above scenerio would not apply to high income individuals. They generally don't need to worry about credit score, make payments by other means and should have a higher ratio of discretionary/total expenses. A $10 - $20 million/year income individual might cap aggregate credit card CL at 5% or 10% of income.

Re: Ideal credit limit

Horseshoez — Sun, 18 Dec 2022 20:12:40 GMT

@Thomas_Thumb, help me understand; how does paying credit cards in full every month (something which I do) cause utilization percentages of upwards of 5% (in your example above)? In my case I rarely see utilization in excess of 0.5% even though I typically charge upwards of half of my total credit limit per month on my cards. And no, I don't micromanage my payments, I pay each card once per month just prior to the due date; this in turn means a few stray charges will leak through between the due date and the statement date, which is what causes me to have anything above a flat 0% utilization (which has happened a few times).

Re: Ideal credit limit

Thomas_Thumb — Sat, 24 Dec 2022 00:50:04 GMT

@Horseshoez wrote:
@Thomas_Thumb, help me understand; how does paying credit cards in full every month (something which I do) cause utilization percentages of upwards of 5% (in your example above)? In my case I rarely see utilization in excess of 0.5% even though I typically charge upwards of half of my total credit limit per month on my cards. And no, I don't micromanage my payments, I pay each card once per month just prior to the due date; this in turn means a few stray charges will leak through between the due date and the statement date, which is what causes me to have anything above a flat 0% utilization (which has happened a few times).

@Horseshoez

In my example above, charging upwards of half your total credit limit would equate to an aggregate credit utilization of upwards of 50%. Why?

Let me try to explain by example and a payment method based solely on statement balances.

a) Payment method - all charges on a credit card made since the last payment will accumulate on the card until the designated statement cut (close) date. The statement is reviewed and paid in full 14 days after the statement cuts - or 7 days before the due date. This provides 14 days of free float.

b) The statement balance gets reported to the credit bureau along with the card's CL.

As an illustration let's go with the $100k yearly income and a $10k aggregate credit limit (0.1x of annual income) spread across 4 cards - $5k, $3k, $1k and $1k.

1) Each month $5k of expenses are placed on the cards in total.

- Card A has $3k of accumulated charges ($5k CL). Statement cuts 12/1 and gets paid 12/14 a week before due date.

- Card B has $1k of accumulated charges ($3k CL). Statement cuts 12/4 and gets paid 12/17 a week before due date

- Card C has $700 of accumulated charges (1k CL). Statement cuts 12/7 and gets paid 12/20 a week before due date

- Card D has $300 of accumulated charges ($1k CL). Statement cuts 12/9 and gets paid 12/22 a week before due date

2) Credit report/scores are pulled on 12/12. Latest statement balances have been reported to the credit bureaus.

- Card A utilization is 3/5 = 60%

- Card B utilization is 1/3 = 33%

- Card C utilization is 0.7/1.0 = 70%

- Card D utilization is 0.3/1.0 = 30%

- Aggregate utilization is (3+1+.7+.3)/(5+3+1+1) = 5/10 = 50%

Sure, cards A, B and C could be paid in full just before their respective statement cut dates and then not used again until a couple days after each cut date. If only card D reported its balance aggregate utilization would be: .3/10 = 3%. 30% UT would show on card D with 0% UT showing on the other cards. That's a pretty good strategy.

Nonetheless I would just allow all charges to accumulate and then just PIF statement balances. My results would be like the below using the rule of thumb where aggregate CL equals 1.0x yearly income. Been paying that way for 40 years just fine. Only time scores dipped significantly was with large home improvement expenditures posting. No big deal as a temporary spike in utilization only has a point in time impact on score.

Aggregate CL is $100k (1.0x yearly income) - each card 10x higher than in above example. - aggregate utilization now drops to 5/100 = 5% and highest card UT is 7%.

Hope that explains things from my perspective. Never had a potential creditor blink twice at seeing aggregate revolving CL near yearly income. They look primarily at payment history and amount of new credit.

Re: Ideal credit limit

Horseshoez — Mon, 19 Dec 2022 03:22:24 GMT

@Thomas_Thumb, ahhh, so the difference is in your example, you let the monthly charges report as a balance, hence the high utilization. In my case, each of my statements either report a zero balance, or a balance of a few stray charges which happen to clear between my payment posting date and the statement cut date. Taking my last month as an example:

Credit Card #1:
- Previous balance: $52.64
- Purchases: $1,110.65
- Payments: $1,156.30
- New balance: $6.99
Credit Card #2:
- Previous balance: $0.00
- Purchases: $1,419.84
- Payments: $1,385.40
- New balance: $34.44
Credit Card #3:
- Previous balance: $0.00
- Purchases: $1,841.03
- Payments: $1,841.03
- New balance: $0.00
Credit Card #4:
- Previous balance: $0.00
- Purchases: $924.49
- Payments: $924.49
- New balance: $0.00

As things stand, my utilization is roughly 0.2%.

Re: Ideal credit limit

PNWRambler — Mon, 19 Dec 2022 19:53:07 GMT

I don't think the optimal overall total credit limit is tied to your income as much as your expenses or potential for emergency needs. And if you're responsible with your credit then you can never have too much, IMHO. For most people, 6 months worth of your normal expenses should be more than enough. Although it's never ideal to live off credit cards, I feel it's good to have a backup to your emergency fund.

Re: Ideal credit limit

FireMedic1 — Mon, 19 Dec 2022 23:42:41 GMT

@Fernando1When I was a newb in '16. My 3 Cap1 cards settled at 44K after the SL and CLI's. Thats when Cap1 was passing them out like candy. I got scared and called Cap1 and turned in 14K in CL's. Then I posted it here and the crowd thought I lost my mind. I thought going over my income would be a problem and stop me from getting better cards as time went on. Nope. Debt to income %'s with loans can be a problem with high util and income. But thats another story. You'll be fine. Thanks for popping in more @Thomas_Thumb . One of my mentors back when.

Re: Ideal credit limit

Thomas_Thumb — Sat, 24 Dec 2022 01:15:36 GMT

@FireMedic1

I appreciate the mention. I don't frequent the forums as much since I paid off my mortgage and became debt free. I am curious about my FICO 10 and 10T scores but, not ready to pay to see them. I am a bit disappointed that 10T still looks at reported revolving balances for pure play, PIF, transactors. I was hoping it would treat all transactors as equal risk. I feel prepaying to avoid charges showing on statements akin to gaming a flawed system. I guess they want to punish those of us that utilize free float.

P.S. My understanding is that FICO 10T and VS 4.0 will become the standards for mortgage loans. Both models look at trended data and rental payment history.