If you have one or two credit cards and are thinking of applying for a few more cards because you see some rewards programs you like, your family or friends might tell you that too many cards might hurt your credit score.
So is there such a thing as having too many credit cards, or is it a myth? Conversely, can you have too few credit cards? What is the best number of credit cards to have anyway?
There is a lot of confusion about this topic. In truth, there is no such thing as an ideal credit card ratio. A large number of credit cards could work in your favor or work against you depending on a number of factors. For this reason, different people have different opinions on the best number of credit cards to have.
The advantage of having a large number of credit cards is that it could actually improve your credit score. Here are a few benefits of having good credit:
∙ You will be able to get hired for a job where they run a credit card background check.
∙ You will save on insurance rates.
∙ You will pay less interest on a house or car.
∙ You will be able to get a business or personal loan.
∙ You will be invited by reward credit card companies to get their card.
Besides the risks associated with overspending, the main disadvantage is that it may hurt your credit because you don’t have sufficient credit history to establish a reputation as a financially responsible borrower.
However, the length of your credit history is only 15% of your FICO score. This score is based on other variables, too: 35% is based on your payment history, 30% on the amount of money owed, 10% on types of credit used, and 10% on new credit.
The total number of credit cards you have in your name is not as important as what you do with these credit cards.
Your FICO score is based on your financial behavior over time rather than how much available credit you have. What matters is if you pay your cards off in full when your bill comes and how you use your available credit.
On average, people who have high credit scores, 800 or above, also tend to be invited to open up more credit by credit card companies.
Hence, someone with a high credit is likely to have more credit cards than someone with a lower score simply because they get approved more often.
Let’s look at a few things that could go wrong if you have too many credit cards.
Entrepreneurs often borrow money the wrong way. One common mistake is that they open up too many lines of credit to kickoff a business idea. Once they've raised the money, they may then pay off the credit cards and close them all down. This cycle of opening and closing credit cards within a short time is viewed as risk taking behavior. There is even a term for it in the credit card industry: it’s called “churning cards.”
2. Multiple Credit History Hits
Although every time you open up a new line of credit, you only impact 15% of your credit score, each time you open up a card you reduce the average age of your credit history. These small impacts can accumulate to hurt you if you decide on a big ticket purchase like buying a new car.
3. Juggling Cards
If you get a number of cards but don’t use them, the credit card companies will close them down. In order to avoid losing your account, you need to spend some money on it. When a credit card company closes down your card due to long periods of inactivity, this reduces your total credit limit. The situation can get out of hand very quickly as you try to figure out which card to use for each purchase. You will almost need a schedule to figure it out.
It is easy to spend money and it is easy to lose track of how much you spend. So with a number of cards, you may spend much more money than you intended. In the book, On My Own Two Feet, Thakor and Keder recommend only using two credit cards. They offer two reasons for this: “First, with too many cards, you may end up spending more in total than you realize. Second, with so many bills, you increase the odds of not paying one of them on time. Paying late will hurt your financial reputation, trigger onerous late fees, and often result in higher penalty interest rates.”
The Road to Recovery
What do you do if you do have a number of cards and start making mistakes with your credit cards like lowering your credit card history, lowering your credit limit due to cards closed due to inactivity, or lowering your score due to overspending? One solution is to look through credit repair reviews on the Better Business Bureau to figure out how to get your high scores back using professional services.
No Perfect Number of Credit Cards
There are benefits to having a large number of credit cards and also dangers. So, it’s not as simple as saying that you should open up as many lines of credit as you can; handle them responsibly; and not worry about any negative impact on your FICO score because the length of credit history is only 15% of your score. What really matters is your behavior.
The number of credit cards you have will not impact your FICO score as much as how responsibly you spend your money and pay your bills each month.
4 Tips for Responsible Money Management
So, what does good credit behavior look like?
1. Create a budget to keep track of how much money you have coming in and how much you have going out. If you don't have a budget, you often unconsciously think of your credit cards as a source of wealth. It’s easy to forget that credit cards borrow money on interest.
2. Keep your balance on every card low so that you can pay it off in full rather than be forced to carry the unpaid balance into the next month.
3. Open up new credit cards slowly and avoid closing them down.
4. Only get as many cards as you comfortably rotate so that some don’t get closed down due to inactivity.
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