Managing Your Credit

Meet Pete D’Arruda: A man with 25 charge cards, more than a quarter of a million dollars in available credit — and a lot of financial self-control.

D’Arruda says he has more than $300,000 in available credit thanks to some 25 Visas, Mastercards, and individual store, airlines and gas cards — or about $12,000 per card. If he throws in his home-equity line of credit, it’s close to $400,000.

“It’s not taboo to have a bunch of credit cards,” said D’Arruda, a personal finance consultant who has been building his credit trove for about five years. “It’s about how you manage them.”

The founding principal of Capital Financial Advisory Group in Cary, N.C., and author of three personal-finance books is testing the more-is-better theory of credit cards: The more cards and available credit one has, the better the credit score — assuming, of course, the bills are paid promptly.

With a FICO credit score in the 810-815 range, it’s working for him. But credit-agency experts say it’s unnecessary and could create a financial maelstrom for those less diligent with their money.

“For many people they would end up with $350,000 in debt and that would not be a very good thing,” said Rod Griffin, director of public education for Experian.

D’Arruda charges everything from coffee to the rent for his office space on credit cards. He prides himself on his ability to manage them all and to pay them promptly, keeping himself from falling into a debt spiral.

“I like to pay my bills on time,” he said. “Even though I have all those outstanding potential balances, I don’t have many outstanding balances.”

What he does have, he boasts, is hundreds of thousands of miles and points, numerous discounts and even freebies from retail stores and vacation spots, waived annual fees on some credit cards and better interest rates on insurance and car and home loans. Typically, the higher the credit score, the lower the interest rate. What’s more, he’s got a running tally through credit-card statements on where he’s spent money both personally and for business.

He’s got a Disney Visa card from Chase — with Buzz Lightyear on it that entertains his daughter Carrie — with which he’s accumulated enough points to pay for a Disney cruise this Thanksgiving. His platinum American Express card points will cover the airfare to Orlando, Fla.

Even cards with fees are a bonus for D’Arruda. He’s got a Visa Black Card, a new elite card with concierge service, access to airport lounges, cash-back rewards or airfare on any airline with no blackouts. He’s assessing it for a year to determine if he’ll use the rewards programs enough to cover the cost of the $495 annual fee, but he got the fee waived to do so.

“They pulled my credit score and saw that I was a good risk,” he said.

Credit scores are calculated through a complicated and proprietary algorithm of measures that differ among scoring agencies. However, there are three major pieces of your credit-score picture that all follow to closely

The most important: Your bill-paying history. It will account for as much as 35% of your total score. Pay all your bills on time. Even if it’s just the minimum payment, make sure that bill is marked paid on the designated date — or sooner. D’Arruda said he sometimes makes two payments a month to keep his balances in order.

Next up is what credit-ratings agencies call the “utilization rate,” or your debt-to-available-credit ratio. D’Arruda, who said his typically stands at about 10% to 15% and no more than 25%, began this credit-building experiment based on the simple notion that your credit score is mostly determined by the amount of available credit subtracted by the amount outstanding.

It’s a fussier method than that, but your utilization rate is worth some 30% of your score. Creditors don’t want to see the ratio over 30% and consider it an important link to your financial acumen and any lifestyle changes you may be facing.

“You don’t need a lot of credit cards to have a good utilization rate,” said Barry Paperno, consumer operations manager for myfico.com, the consumer arm of credit-scorer FICO. “And obtaining 25 credit cards for your score is overkill. Utilization looks at percentages more than dollars.”

Consider it this way: If you have $300,000 in available credit and carried a $30,000 balance, your utilization rate is 10%; if the available credit stands at $3,000 and you charged $300, your utilization rate is the same.

What you must have are credit limits that meet your charging needs, said Steven Katz, senior director of operations for TransUnion, the credit- and information-management company. “You may need a smaller number of cards with higher limits or more cards with smaller limits to stay under that 30% utilization rate.”

Don’t max out one card over another either in order to keep the utilization rates under 30%, he added. If you take out a store credit card with a $5,000 limit and you charge $4,750 for a home-theater system, your utilization rate on that card will set off alarms.

“It’s a good idea to try to keep the balance on each card under 30% of the limit,” Katz said. “It will help guide your efforts to keep your overall credit use low.”

A perfect score is near impossible to get and having credit but not using it won’t get you there. That’s doesn’t mean that you have to carry a balance that you must then pay interest fees on each month. You just need to use the card and pay it off to maximize your credit score.

“The ideal place to be is under a 10% utilization rate but over 0%,” FICO’s Paperno said. “There needs to be some kind of recent activity” to activate a score.

Your credit mix and history contribute about 15% to your score. Creditors like to see how you handle revolving credit, or credit cards, and installment loans, like mortgages and car and student loans. They average the age of the accounts divided by the number of accounts. Surprisingly, income doesn’t play a very significant part of the credit score.

D’Arruda had a long credit history before he started on this venture and said he was cautious about how much credit he applied for when. That’s because your score gets dinged each time it’s checked for new credit. Applying for too much credit at once has creditors worried that you’re in a financial bind and getting ready to rely on credit you might not pay back.

New accounts opened also impact your score by about 10% for much of the same reason. “Taking on new credit has shown to indicate a higher level of risk,” Paperno said. “People who go into default tend to have added new credit more recent than those who haven’t.”

D’Arruda admits he started collecting credit cards as a personal challenge to see how many he could get before he got cut off. The limits on each card vary, of course, and he’s even got an American Express that has no limit, though he’s not willing to test what that might mean.

“This is a lesson in discipline,” he said. “When you get the credit card, it’s like free money. You have to manage them well. It all comes down to not overspending because it’s not your money.”

And he said he only chooses cards that will help him with points, miles, cash back and other perks. He likes the 30% discounts he gets at Kohl’s, for example, and the special sales offered only to Home Depot and Best Buy cardholders. He’s a big fan of the Capital One card because it offers double miles.

His tool for limiting credit-card abuse? A metal money clip. It only holds five cards at a time, which helps him to monitor spending.