by Moe Zilla

Created on: August 06, 2010

Here's the truth. When your credit score is calculated, one factor that you can be penalized for is extra credit cards. Even if you're not using them, the extra cards are still identified in any detailed credit check, and they're factored in to the formula when your personal credit score is assigned. To understand why this happens, you need to understand the factors that determine a credit score.

Nobody wants to lend money who's already horribly in debt, which is why lenders always check how much debt you're already carrying. Now think about it from a lender's perspective. If you've got an extra credit card with a $10,000 limit, you're still capable of racking up $10,000 worth of credit card debt at some point in the future. For all they know, you could be about to go out and take an expensive three-month vacation.

This is why a credit check doesn't stop with just the amount of debt that you're already carrying. There's a complicated algorithm which which tries to identify which consumers will have trouble paying off their balances. Obviously there's one scenario where a future debt suddenly overwhelms a consumer's ability to pay down their smaller debts on another card. Having extra unused cards will trigger a flag for this scenario - and it's reflected by a drop in your credit score.

And there's another scenario which lenders are also worried about. If you've assembled a big collection of credit cards, the credit agency is going to wonder: why? What happened that made you suddenly decide that one card, or two, just wasn't going to be enough. Were you anticipating some major debt in the future, which is why you lined up extra credit in advance? The bottom line is that most people don't have lots of extra credit cards - so if you do, you're going to stand out as unusual when they assign your credit rating.

My newspaper once told the remarkable story of a man who funded his start-up biotech company with cash advances from all of his credit cards. He first took that money to Nevada, and gambled it all on blackjack. But the man was a card-counter, and carefully built up that precious pool of cash. Yes, he earned enough money to pay back all the credit card companies - and to start up his own business. But that's the kind of crazy debt-binging that you're capabale of if you have a lot of extra credit cards.

And it's the reason that it will trigger a red flag when they're calculating your credit score.

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