Should You Spread Your Credit Card Balances Over Multiple Cards?
October 31, 2013
This is a fascinating question with more than one answer, of course. When it comes to credit cards, many consumers are confused as to what is better. Should you have one maxed out credit card or spread the balance over a number of cards? The answer is no and no.
Neither of these options provides much help for your credit score. One maxed out credit card will wreak havoc on your FICO score, while spreading it over multiple cards can also damage your score.
The problem you run into is found at the core of the credit scoring algorithm. The balance-to-limit ratio is a very important factor in your score. Basically, the credit reporting agencies take your total balance and they divide it by your total extended credit limit. For example, if you have one credit card with a $1,000 limit and you carry a $700 balance, your balance-to-limit ratio is 70%.
With this said, spreading the balance of one maxed out card over multiple cards won’t reduce your balance-to-limit ratio. If you have five credit cards and the total credit limit is $10,000, it doesn’t matter which cards you carry the balance on. Your ratio will remain the same unless you increase your credit limit or change your balance.
Not only does a high balance-to-limit ratio hurt your credit, but also spreading the debt out will hurt your score, as well. If you go from one account with a $1,000 debt to 4 accounts with portions of the debt on each, you increase the number of accounts with a balance, which isn’t good for your score.
It may seem like the obvious answer is to open more cards, but this won’t help either. It will lower your ratio, but it will also lower the average age of your accounts, which is another factor in your score.
The only real way to improve your credit, in this type of situation, lower your balance.