Is it time for a new credit card?

[10can]

I am trying to advise a relative on if they should get a new credit card or not.

She is about to turn 20 years old and for the last year she has only had one credit card (MTV Student Visa Card from Citi) and has always paid in full each month.

In thinking of the future and I know part of a good Fico score is length of credit history so would it be wise for her to now apply for a MasterCard or should she just keep the one Visa all through college?

Thanks

[humandraydel]

I would just keep one. Part of your credit score is amount of available credit - too much available and lenders will think that you have the possibility of getting underwater easily.

[Ima saver]

I agree, I would just keep one also.

[10can]

I got this response over on the MyFICO Forums, what is your thoughts on this idea?

I would have her bite the bullet and get three or four credit cards now. Insane? No...gaming the FICO system. Here's why:

Right now she has one account. Sooner or later, she's going to want another credit account...a card, a car, a house. Five years from now, her average age of accounts will be 5. If she gets a second account, that's slashed to 2.5.

On the other hand, if she already has five revolving accounts, her average age will be 5 in 5 years, and getting another account will only lower it to 4.25 or so.

I encourage young people to get a card, work their score over 700, and then lock in three or four more cards.

Note that having a credit card and using a credit card are two different things.

[humandraydel]

My response is the same. If you have 5 cards, no one else will want to lend to you because you have the potential to get deep under water. That's not a good sign. Also, I don't think it's the "average" age of your accounts the way that poster implies.

[LuxLiving]

Humandraydel, I'm of the opinion that it has more to do w/credit limits on each card than you are accounting for. Lots of folks have more than five cards and get more offers daily in the mail. Debt to income ratio is important like you are saying, but if they've only got a small credit limit on the cards, stay current on their payments and have a good FICO, then they should have no trouble.

My question to OP is why they are needing credit to begin with? Are they wanting to buy a home?

AND are you also advising them to get an Emergency Fund in place? Put away for retirement, etc., etc.???

[noppenbd]

If you have 5 cards, no one else will want to lend to you because you have the potential to get deep under water.

Although this statement makes sense to me, I don't think it is truly reflective of how credit scores work. According to myfico.com, here are the 5 components of your credit score:

35% Payment history (late payments, past due accounts, etc)
30% Amounts owed (current balances on accounts, # of accounts with balances)
15% Length of credit history
10% New credit
10% Types of credit

I don't see anything in there about the total amount of available credit. I think the only harm done in applying for a new card will be temporary (in the 10% New Credit category), as long as the cards are paid off in full every month. It is very easy to get cards in college and as long as they are used responsibly it is a good way to build a credit history.

[10can]

My advise to her is only in regards to building a good credit history so when it comes time to get a new car or new home she can get the lowest finance rate possible.

We have already discussed savings.

I'm just trying to learn if establishing credit is better to do now while she is young and later on show a long history of credit or if it really doesn't matter and just wait until after college to worry about credit history.

Thanks

[safari]

From my personal experience, the number of credit cards does not hurt the credit score. The opposite is true - the higher the credit limit, the better, because it lowers your credit utilization ratio. If you owe $2,000 and your credit limit is $5,000, your credit utilization ratio is 40%. With the same $2,000 debt and $20,000 credit limit, your utilization ratio is only 10%, which improves your credit score. I have about 10 credit cards with the total limit around $200,000, and my credit score is 750. The length of accounts is also important. It's always better to get credit cards sooner than later.

[humandraydel]

From my personal experience, the number of credit cards does not hurt the credit score. The opposite is true - the higher the credit limit, the better, because it lowers your credit utilization ratio. If you owe $2,000 and your credit limit is $5,000, your credit utilization ratio is 40%. With the same $2,000 debt and $20,000 credit limit, your utilization ratio is only 10%, which improves your credit score. I have about 10 credit cards with the total limit around $200,000, and my credit score is 750. The length of accounts is also important. It's always better to get credit cards sooner than later.

I agree with the utilization ratio, but the number of accounts, and in particular the number of recently opened accounts IS a factor. My score is 740 and I was recently rejected for a Best Buy credit card. I was told the reason was that I had opened too many accounts recently. This is also why it is commonly suggested that if you are going to apply for a loan for a house, that you not apply for any other credit in the previous 6-12 months. It is also why loan inquiries in a 30 day period are considered 1 inquiry....because "shopping" around for a loan was actually having negative consequences.

To be clear, I'm not saying that having a significant amount of available credit will hurt your SCORE. I'm saying it may make lenders reconsider lending to you. I found this on the equifax website (under the definition of available credit):

"Available Credit - On a credit account, the credit limit minus the current balance. To many creditors, your total available credit on all your accounts is an important factor."

Credit Glossary of Terms: Credit Report, Credit Score & Identity Theft Definitions

[10can]

I know there are many different types of credit cards (rewards, low APR, Balance Transfer, etc...) but what banks are the best to have your credit cards with?

I ask this because I was looking at the Geico MasterCard that was offered by Merrick Bank and I think it is now offered by New Millenium Bank and I read post where people didn't like these banks at all.

Thanks

[noppenbd]

My score is 740 and I was recently rejected for a Best Buy credit card. I was told the reason was that I had opened too many accounts recently. This is also why it is commonly suggested that if you are going to apply for a loan for a house, that you not apply for any other credit in the previous 6-12 months.

I think the key word there is "recently". Inquiries/opening new accounts do not hurt you much in the long term, only in the short term, and they only affect 10% of your score. So opening accounts now would not hurt a college student who was planning to buy a car in a few years, as long as the cards were not charged up.

[LuxLiving]

Humandraydel, we had a similar experience when getting our last mortgage. We have excellent credit and yet we had a blip in the process because of the amount of CC credit we had available. They said, "we could conceivable charge up that amount" and that was a problem to the lender. We were able to get the mortgage quite easily by calling the CC company and asking for the credit line limit to be lowered.

[noppenbd]

Humandraydel, we had a similar experience when getting our last mortgage. We have excellent credit and yet we had a blip in the process because of the amount of CC credit we had available. They said, "we could conceivable charge up that amount" and that was a problem to the lender. We were able to get the mortgage quite easily by calling the CC company and asking for the credit line limit to be lowered.

Maybe it depends on the kind of credit check/underwriting involved. For credit cards, auto loans, etc, my guess is they are not going to get that detailed in their analysis, it is just going to be a credit score cutoff, which it seems is not affected by the available credit. I could see it coming into play for a mortgage, but like you said the problem is easily solved by lowering the credit line. So I stick to my original recommendation to get 2-3 cards now and keep the balances very very low (preferably zero).

[LuxLiving]

Right noppenbd, I agree.

edited to add:
I just want to point out we have many cards, but only one had an outrageous credit limit amount $$$,$$$.$$ and so, we just had to call one company and ask that theirs be lowered. This was before all the identity theft stuff became so widespread, so in reality it was a smart move for us anyway. There was no way WE were ever going to charge up that much stuff. Not in a million years!