Liz Weston

Dear Liz: My wife and I recently paid off our home mortgage and now have only our two Visa cards, which we pay off in full each month. Depending on our monthly expenses or purchases, those balances rarely exceed a few hundred to possibly as high as a thousand dollars. Each card has a limit of several thousand dollars and would be much higher had we not previously requested lower limits on the accounts.

My credit scores have plummeted from well over 800 to the low 700s. One site that reports credit scores suggested that I open more credit accounts, because lenders supposedly like to see a variety of accounts when assessing creditworthiness.

This makes no sense to me. I have had an excellent credit track record for decades.

I’m concerned that with our current scores we may not qualify for preferred (0%) financing when we make a couple of car purchases in the not-too-distant future. While we could pay for those purchases in cash, my preference would be to take advantage of such a financing option and keep my money in accounts that would continue to increase in value.

Are we stuck with this situation unless we are willing to go into further debt?

Answer: No, but you need to be a little smarter about how you handle your credit.

You didn’t help yourself by asking for lower credit limits. The formulas like to see a big gap between the amount of credit you have and the amount you’re using, even if you pay in full each month. Ideally you would keep your utilization percentage in the single digits.

The closure of your only installment loan likely took a toll on your scores as well. As you were informed, credit scoring formulas favor those who responsibly handle a mix of credit — loans as well as cards. You can have good scores using just credit cards, but you might not achieve the highest possible scores without an installment loan.

Does that mean you won’t get 0% financing when you’re ready to buy a car? Perhaps, but 0% financing is pretty hard to find these days anyway and may not be the deal you think. You typically have to give up manufacturer rebates to get special financing deals and dealerships are often more resistant to negotiating on price. In other words, what you save on interest may be more than offset by a higher price tag for the car. You may find yourself better off using a low-cost auto loan from a credit union or paying cash.

If you do want to finance the cars, start by asking your credit card companies to restore those higher limits. Consider opening another credit card account or two if the first vehicle purchase is six months or more in the future because your credit will need a few months to recover from the temporary ding of the applications.

Another option is to get a small personal loan, which would add an installment loan back to your credit mix. Only you can decide whether paying some interest now is worth the possibility of paying less interest on a future auto loan.