How many credit cards is too many?

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Too many credit cards

Credit cards are amazing financial tools when used appropriately. They are a great convenience if you don’t want to walk around with piles of cash in your pocket. They can be a godsend when the car breaks down unexpectedly and you don’t have the cash. So, is there a ‘right’ number of credit cards to have? When would another credit card be a bad decision? This article discusses considerations for when you may have too many credit cards.

How is your credit score calculated?

Before we examine the pros and cons of owning more than one credit card, it’s important to know how credit providers calculate your credit score. That will already go a long way in helping you understand when applying for another credit card could become a problem.

Debt-to-credit ratio

This ratio is also sometimes called the credit utilization ratio. What it does is measure the total amount of your outstanding debt as a percentage of your available credit. In other words, how much of your available credit you have already utilized. This carries a weight of 30% when calculating your credit score, so it’s very important.

To give an example: If you have three credit cards with a combined credit limit of $10 000 and you owe $5,500 on all of them, your debt-to-credit ratio is 5,500/10,000 x 100 = 55%.

The bad news is that a ‘good’ ratio is only 30%. At 55% you are well over that.

Going back to the example in the previous paragraph, if this was the only criteria you would be better off by getting two more credit cards, thus pushing up your available credit to let’s say $20,000. Your current debt of $5,500 would represent less than 30% of that amount, so your debt-to-credit ratio would immediately improve. There are other, even more important, factors to consider though.

Payment history

When it comes to calculating your credit score, this one is even more important than the credit utilization rate discussed above because it has a weight of 35% when calculating your score.

Things like late payments and even worse, non-payments are quickly reported to the credit bureaus – and they will negatively affect your credit score. So if you can’t properly manage 3 credit cards, think twice before applying for more.

Credit history

This has a weight of 15% when calculating your credit score. What it measures is for how long you’ve had a history of being responsible and paying your debt on time, every time. Someone with a top credit score typically has an 11-year credit history for all their credit cards combined. This is where a new credit card could negatively impact your rating because your credit history on this one will obviously start at 0.

Credit mix

Credit bureaus check how well you are able to manage, not just your credit card debt, but also other types of debt. They like it if you have a credit portfolio that consists of different types of credit, including credit cards, installment loans, retail accounts, a mortgage, and a car loan. Your credit mix has a weight of 10% when calculating your credit score.

New credit

Whenever you make new debt, e.g. getting another credit card, it could cause a temporary drop in your credit score. This happens twice, when the credit bureau inquires about your credit history, and again when the account is opened. New credit counts for 10% when your credit score is calculated.

The benefits of having different credit cards

Having more than one credit card can help you to get the maximum rewards every time you buy something with a card.

Some credit cards, for example, give you 2% back on all your gas purchases. With gas prices increasing regularly, this can come in very handy. Other cards, such as Discover it Cash Back, gives you 5% cash back on purchases like gas, groceries, restaurants, and hotels during certain months of the year. Some others even give you 1% cash back on all your purchases.

If you use these cards responsibly, you could potentially get cash back on all your purchases throughout the year. The keyword here is responsibly. Applying for cards left right and center just to get cash back, and then spending much more than you normally would have, makes no financial sense.

How many cards should you have?

There is no single right answer for everyone. It depends on your ability to manage debt, the reliability of your income, other types of debt you might have, and more. You should consider all the factors below before making a decision about getting another credit card.

Factors to consider before applying for another credit card

Some of us feel that a relatively small number of credit cards, for example, between one and three, is totally enough. Others just can’t stop themselves from responding to offers for new credit cards they find online or get via email or snail mail. Is one of these groups always right and the other group always wrong? The truth is that the circumstances under which you obtain a new card and the way you manage it are of more importance than the actual number of cards you carry.

Having said that, it could make financial sense to have a primary credit card that is used for the bulk of your spending and then to have one or two cards for ad hoc expenses such as when the car needs a service or repairs, or unforeseen medical expenses.

It could also work to keep a card specifically for a certain type of expense if you get cash back or bonus points just for that. Keep in mind though that having too many credit cards relative to our salary, even if you do not use those cards often, might flag you as a potential credit risk, and lenders could start degrading your credit score. So don’t overdo it.

Is it a good idea to have a credit card for emergencies?

If you are on vacation and the car unexpectedly gives problems, having a credit card to pay for repairs can be a godsend. The same goes for if your dog suddenly requires expensive treatment. If you or your spouse should lose your job your emergency savings could be drained very quickly and a credit card can be extremely useful. A good idea is to get a card with a fairly high credit limit, no yearly fees, and a low interest rate and keep it only for situations like these.

Do you already have too many credit cards?

If you believe that you might already have too many credit cards because you no longer use some of them, do not indiscriminately start closing these cards without spending time to think about the impact it might have on your credit score. Closing a card that you’ve had for 15 years will shorten your credit history, and this is one of the things that play a major role when your credit score is calculated.

Closing one or more credit cards also negatively impacts your available credit. Also, it could also hurt your debt-to-credit ratio if there are outstanding balances.

The best option is not to close these cards but put them on ice. Should you get a warning about an inactive account from your card issuer, use that card again once or twice to stop it from being closed. You could also keep a card you use less often as a backup, particularly if it has a fairly high credit limit. Just keep it in the wings for major unexpected expenses.

Another way to handle a card you got years ago but which you are not really using any longer is to call the card issuer and ask them to switch to a product that better suits your current needs instead of closing the account altogether. That way you will not negatively impact your credit history.

When is getting another credit card a good idea?

You have undoubtedly been solicited many times by credit card companies to open a new account. They will often even tell you that you have been pre-approved so everything is just a formality. Should you feel tempted? The answer is it depends. Below are a few good reasons why you might consider applying for another credit card:

  1. They offer a very competitive interest rate
  2. They offer a really impressive introductory bonus and various other rewards
  3. You want to transfer an existing balance, particularly if the new company e.g. offers 0% APR
  4. You want to boost your available credit for a better debt-to-credit ratio. This won’t happen if you proceed to spend the maximum available amount on the new card.

When is having too many credit cards bad?

Having several credit cards can harm your credit score under any of these circumstances:

  • Your combined outstanding balance on these cards exceeds 30% of the total amount of available credit
  • You are not able to pay the minimum amount required on all the cards
  • You have applied for too many credit cards in a relatively short period
  • Your credit portfolio is not diverse enough. You should, e.g., not only have credit cards but also a car loan, mortgage, etc.

Wrap up

As we’ve seen above, there are many benefits to having more than one credit card. All of them, however, mean very little if you fail to manage these cards in a responsible manner. To make sure that having more than one credit card will benefit you and your family, you should know exactly which special offers come with each of them, their various credit limits, and of course when they have to be paid. Always pay that balance in full and make sure to pay it on or before the due date.