As you might expect, there is no right answer to the question of “how many credit cards should you carry.” As with any aspect of personal finances, it depends on a number of factors specific to your situation, such as your spending habits, budget, income, debt load and your ability to manage credit.
While credit cards can be effective cash management tools for some, for others they can be too much of a temptation for spending beyond their means. It can be difficult to get through life without a credit card, but each person needs to determine for themselves whether they can get by with just one or two, or whether they need to carry five or six.
How Do You Compare to Others?
, about three quarters of U.S. adults have at least one credit card while the average person carries 2.7 credit cards. However, when all of the people who carry zero credit cards are excluded from the data, the average jumps to 3.7 cards per person.
Then there’s Walter Cavanagh, age 70, who has earned the Guinness World Record by holding 1,497 credit cards. The total line of credit on all his cards is $1.7 million, but he insists his credit score is near perfect. In practice, he only uses one card that he pays in full every month. He began his credit card binge based on a bet with a friend, and it just continued to mushroom.
While no financial planning or credit expert would ever recommend carrying too many credit cards, there is no clear consensus on what is considered “too many.” Most would agree, however, that it doesn’t matter how many cards you carry to some degree. What matters is how well you manage them.
What’s Your Number?
Everyone should carry at least one credit card. You need it in case of emergencies or when you’re caught short of cash. It’s also important to use a card periodically just to maintain a credit history; without a good history, you could find it difficult to obtain additional credit when you really need it.
Most people can get through life with just one credit card as long as they have the ability to pay the balance in full each month. If you run up the balance too high on one credit card, not only will it become useless to you in emergencies, it will also hurt your credit score. If you are currently limited to one credit card due to your credit situation, the best course of action is to use it sparingly and pay the balance each month.
If you have been limited to one credit card because of your credit situation, you are probably more tempted to accept that pre-approved offer for another card when it comes in the mail. Should you carry two cards? There are four reasons why you might want to carry at least two credit cards.
- You can effectively manage your spending each month using credit cards but your credit limits are still somewhat low.
- You’re ready to make a larger purchase, such as a television, and you need a card with a higher limit.
- You have demonstrated responsible use of one credit card and would like to build your credit score with better benefits on another card.
- You would like to maximize your credit card rewards with a better promotion.
Using credit cards in your daily spending activities can be a good idea as long as you have the intention and ability to pay your balance in full each month. They can be effective cash management tools for people with disciplined spending habits. For larger purchases, they can provide additional warranty and purchase protections. And, if you are trying to increase your credit score, multiple, well-managed credit accounts are the best way to do it.
If you have been able to manage well with one or two credit cards, adding a third card isn’t likely to improve your cash management, but it can help you to continue to build your credit score. The key is to keep your balances from exceeding 30% (this number varies) of your credit limits to maximize your score and avoid higher debt expenses. Generally, people will get a third or fourth card because it can offer something that can improve their current financial situation. Cash back rewards cards which pay cash back on purchases can generate savings throughout the year, or a 0% balance transfer card might be useful in paying down high interest debt from another credit card.
The key determinant in the number of credit cards you should carry is your ability to effectively manage your credit. With an eye towards increasing your credit score along with your cash management effectiveness, credit cards can be very useful tools. You just need to know your limitations.
How Adding Credit Cards Affects Your Credit Score
If you are a novice credit card user you should focus on building a credit history with one or two cards and keeping your debt-to-credit ratio below 20%. If you have been using credit cards for a couple of years, it may make sense to add a card to obtain a lower interest rate or to transfer a balance to a zero-interest card. Adding credit cards for specific purposes, such as a good rewards program or for obtaining better travel insurance, can also make sense as long as it is not done within a short period of time.
If maintaining a high credit score is important to you, it is important to understand how adding a card can affect it. Adding a new credit card can help your credit score over time. When you add a card you increase your total credit limit which can lower your credit utilization (debt-to-credit limit) ratio. You will also add to your credit payment history. Your payment history and your credit utilization ratio are some of the biggest factors in scoring your credit.
However, when you apply for a card, it can knock your score down a few points. This happens because the credit card issuer will pull your credit report to evaluate your creditworthiness. That results in a hard inquiry, which can temporarily lower your score. Hard inquiries are considered bad by the credit card issuers because it indicates you are taking on new debt, making you a higher risk. Too many hard inquiries on your report are an indication you may be in financial distress.
If you apply for credit, don’t apply with more than one creditor at a time and refrain from applying more than once within a six month time frame. After about 12 months, the hard inquiries are no longer counted against you.
In general, adding a new credit card can help your credit score if it is done for the right purpose and managed well. The key factors for improving your credit score are payment history and credit utilization, so be sure to use the card, make on time payments, and keep your credit utilization below 30%.
What to Do If You Think You Have Too Many Credit Cards
If you feel that you might have too many cards, avoid the temptation to close any credit card accounts. Closing credit card accounts will not help your score. In fact, it can hurt your score in several ways. First, closing one of your older accounts will shorten your credit history. Your credit history is one of the biggest factors in determining your credit score. Second, the payment histories on your closed accounts will eventually fall off your credit report, also hurting your score. Third, it will reduce your available credit. If you carry balances on your other credit cards, it could increase your credit utilization ratio.
The exception might be a credit card you don’t use and are paying a high annual fee to carry. If you feel that you have to close a credit card account, choose your newest account. You could also get by with closing credit accounts from retail department stores. They tend to have low credit limits so it shouldn’t affect your credit utilization ratio quite as much.
In terms of keeping your credit score from falling, you might be better off not closing any accounts. Instead, just keep them on ice and carry the one or two credit cards you prefer the most.
There is no hard and fast rule to determine how many credit cards you should have. Your number depends on your circumstance, spending habits, and how well you manage your credit. Having more cards can make it more difficult to track and manage your credit, but it can also help you build your credit score. The key is to carry no more cards than you can comfortably manage while maintaining firm control over your spending.
Author: Andrew Rombach
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