Credit cards are convenient, especially when you are traveling. But, how do multiple credit cards affect your credit score? How many credit cards do you need?
In previous articles, we stressed the importance of using cash as much as possible. Charging your payments can mask the true amount of your expenditures. It is easy to rack up significant credit card balances that you cannot pay.
Credit card debt will cause your credit score to tank. A bad credit score costs you money. If you succeed in getting financing, you will be stuck with the least favorable interest rates and fees.
A bad credit score will impact your insurance rates. It could cause you to lose out on your dream job, with a salary that will help you pay all your bills! Even your prospective landlord is looking at your credit score.
Be Disciplined
While there are good reasons to use a credit card, you need to apply discipline to avoid credit card debt. Multiple credit cards may make good sense, especially if you are taking advantage of cash back and other rewards. You may want different credit cards to use for different purchases, to maximize your rewards.
But discipline means that you do not charge more than you can pay. The inability to pay your credit card bills is one of the leading causes of financial stress. Therefore, you want to be very strategic about using your credit cards. It is not necessary to own multiple credit cards and doing so might compound your problems.
Multiple Credit Cards Will Affect Your Credit Score
The impact that multiple credit cards have on your credit score depends on how you use them. If you routinely pay off the balance each month, holding multiple credit cards could cause your credit score to improve. If you max out all your credit cards and miss payments or pay late you will harm your credit score. It is all up to you.
Credit Utilization
A major component of your credit score is calculated according to your credit utilization. One-third of your credit score is based on this factor alone. Ideally, you want your credit utilization ratio to be around 20% but no higher than 30%. If you have used up most of your available credit, your credit utilization percentage will be high. This is an automatic red flag for any lender.
Approximately 65% of your FICO score is determined by a combination of your credit utilization and your payment history. Therefore, keeping your balances on multiple credit cards below 30% utilization and making all your payments on time, will positively impact your credit score.
You Need to be Organized
The more credit cards you have, the more likely it is that you will forget to pay one or more of the bills. If you own multiple credit cards, but you are highly organized and never pay late, your credit score will not be negatively impacted. Take advantage of automation platforms and other hacks that guarantee you will not miss any payments.
Be Careful How Often You Apply for a New Credit Card
Frequently applying for credit cards is not good for your credit score. Each time you apply for a credit card, it results in a hard pull on your credit report. This alone will bring your credit score down. Ideally, you should wait around six months between applications.
Keep Your Accounts Open
Closing your credit cards is not good for your credit score either. Closing a card does not improve your credit score. One of the factors that go into your score is the length of time that your credit account has been open. Furthermore, multiple credit cards mean that you have a higher credit limit. If the balances are zero on most of your cards, then your credit utilization rate is going to be excellent. If you decide you want to pare down on the number of credit cards that you have, leave the account open, pay off the balance and put the card away.
How Many Credit Cards Should You Have?
There is no general rule regarding how many credit cards you should have. According to a TransUnion survey, the average consumer has 2.69 credit cards. The decision is yours. But it should be made based upon an honest evaluation of your spending habits: can you stick to your budget? Will you keep the balances low? Will you pay your bills on time?
Bottom line: Multiple credit cards can have a positive or negative impact on your credit score. It all depends on you.
