Credit Cards: Is There Such a Thing as Too Many?
Since the advent of credit cards, there has been heated debate about whether there is a benefit to having more cards or not. Of course, like most things in life, the answer is not so simple as yes or no. Lifestyle, income, and your level of personal responsibility all factor into how many cards it’s appropriate for you to have. When you also take into account how credit cards measure into your FICO score, which gives you your credit score, then how you are able to handle a single credit card or more really starts to matter. We are going to dive into all that goes into making an informed choice over whether you should have one, a dozen, or none at all and how it can affect your credit in this article.
How Is the FICO Score Calculated?
When companies tally your FICO score, the actual quantity of cards you own only makes up a paltry 10% of your score. The remaining 90% is split between other factors. Payment history accounts for 35%, while the total amount of debt you owe is 30%. After that, 15% is accounted for by your credit histories length, and the last 10% is any new credit you have recently taken on. So whether it is credit cards, a mortgage, a loan from your school, or a loan for a new vehicle, all these credits you have accumulated account for only 10%. This is not exactly something to worry about, except if you take other factors into account.
How Many Cards Do Most People Have?
Most Americans find themselves owning between two to three credit cards at any given time. And according to FICO, the people with the highest credit scores on average tend to have around that same number of cards, which could be extrapolated to mean that most people have good credit scores, but that’s probably not the case.
What is the Debt to Credit Ratio?
The number of credit cards you choose to own can make quite the difference towards one of the more important factors that creditors look at when checking your FICO score, and that is the total debt you owe in relation to your total credit limit. If you have a single card with a limit of $1,000 for example, and you owe $300 on it, it’s not bad. But if you have four cards with a total of $20,000, and you only owe the $300 on the one card, well that looks fantastic. Your debt as compared to your credit limit is very large, and creditors love that. Of course, you must factor in the fact that opening new credit card accounts lowers your score around five points for about six months or so. There is a second option as well, which is simply to attempt to raise your credit limit on a single card, which not only avoids the score loss you get when opening new cards, but also keeps your credit more manageable, as you simply need to deal with one card instead of multiple.
Do More Cards Equal More Benefits?
With so many credit cards available to consumers these days, it’s no surprise that people keep getting more and more. The question to ask yourself is whether the cards you have gotten yourself offer any benefits besides being able to overspend more than you should and rack up enormous debt. Many of the financial experts online argue over whether the point systems offered by most credit cards are worth it or not. After all, you can get one card that gets you points or money back for those pesky gas bills or grocery shopping and another to help with all the traveling you do for business, as well as the eating out you’re forced to do while roaming around. The logic behind this is that you need to do these purchases regardless, so you might as well make some points and get free money or travel rewards. There are, of course, numerous other benefits that credit cards can offer, such as different forms of insurance, and lounge access at airports. But this ignores certain things that credit card companies don’t want you to think about.
Do Your Points Actually Mean Anything?
With all those wonderful benefits that credit card companies are advertising, you would think every credit card is a steal. But the simple fact is, it really depends on who you are and your spending habits. For the average person, most credit card benefits just don’t add up. A simple annual fee per year can sometimes wipe out any points you may accumulate. That is not considering any of the transaction fees you may get hit with, especially foreign transaction fees if you are traveling and trying to accrue travel points. The average point card is going to give you barely any points if you spend less than $10,000 a year on it, and the risk of overspending is increased greatly when you own a credit card and keeps multiplying with every card that you own. With the monkey in your brain telling you to spend more to gain points for this card and spend with this card here so you can get those points, anyone without a Zen master control of their impulses is going to end up spending more money than they can safely pay back. The kicker is that, if you don’t pay the full amount back to a company per month, you won’t even get those lovely points you dreamed of regardless.
The one kind of point card that may be of some use would be credit cards that offer a high point system for traveling. This can be really great for those who travel for business and make a decent salary. The accumulated points can lead to first-class seat possibilities, great free lounge access, and other dining and entertainment benefits. For those who do not travel for business but who love to travel, these kinds of cards can be great as well. There are caveats of course. Just like with any card, if you cannot handle your payments per month and don’t have your debts down to zero, or close to there, then this is a bad idea. Another thing to understand is that many credit card companies do not allow you to simply redeem your travel points anytime and on anything you want; ghe offers vary, and if you do not have the flexibility to travel throughout the year, you may lose out on using those points at all. Always read the fine print.
Why New Cards Are Risky
When thinking about opening new credit card accounts, keep in mind that, even though it does not affect your credit score much, it does affect your score in other ways. One of the methods creditors use to assess your credit is seeing how old your credit history is, and when you open up a new account, especially if you do this often, then the average age of your history is going to be reduced significantly. This only tends to matter if you happen to be preparing to get a loan of some magnitude, such as for a house or car.
How Organized Are You?
Many of the companies offering credit cards these days close down your accounts after long periods of inactivity, which means that if you’re someone who has decided to open up quite a few credit accounts because you want to utilize the point systems, you can find yourself playing a game of switching between one card and the next just to make sure they stay active. The question to ask yourself at that point is whether or not you are organized enough to keep track of all the different cards. Automatic payments can help to a degree, but you still need to be aware of all the card fees, point systems, whether points expire at a certain date, and a host of other factors. If you don’t have all that under control, you can miss out on payments,or have an account be forcibly closed, which negatively affects your credit score and credit card age history, as well as reduces your total credit limit.
The Good vs. the Bad
At the end of the day, only you can decide whether having multiple credit cards can be a positive or negative influence in your life. With the myriad of point systems, travel benefits, private access, and other goodies credit card companies are offering to draw in customers these days, a smart, organized individual with enough control to get bills paid on time every month can really rack up a lot of benefits per year using their credit cards. On the other hand, if you are not the kind of person who can handle one or two credit cards efficiently or simply do not have the kind of stable, good salary and the self-control to go with it that allows you to keep your finances in order, it is definitely better to resist the temptation to fill up your wallet with credit cards. One card is more than enough for most people out there.
Major Points to Remember
- The number of cards you own only affects your credit score by 10%.
- However, the more cards you open can reduce credit age history.
- More credit cards can up your credit limit, which can be good.
- The point systems and benefits of credit cards can be great, but only if you are paying your bills every month and aren’t swamped in annual fees and other hidden fees, as well as spending large quantities of cash.
- Having inactive cards can lead to forced closings by companies that lead to negative credit scores.
- Be honest with yourself about your ability to control your spending habits – don’t let getting points get you stuck in thousands of dollars of debt.
- Remember, credit cards should benefit you, not ruin your life.