While it would be nice to say that there is an ideal number of credit cards that everybody should have, unfortunately, it’s really not that simple.
The right number of credit cards for you could be very different from everybody else. The ideal number for you can change based upon your spending habits, credit score, and many other factors. But let’s talk about how credit cards can affect a person and give you the information to assess if you have too many, too few, or the right amount of cards for yourself.
Americans and Credit Cards
The American dream consists of buying all of the things you could ever want or need, or so we’re told, and it only makes sense that credit cards help us do that. Americans love their plastic, and having a credit card is a must, thanks to rewards and the security of easily accessing money, even without cash. According to a quarterly report done by the Federal Reserve Bank of New York in 2019, the average American has at least two credit cards. To you, this might seem either high or low. Regardless, this can give you a good idea of the relationship between Americans and credit and where you currently stand.
Credit Cards and Your Credit Score
The first thing you need to know about having credit cards is how they affect your credit score, specifically your FICO score. Your credit score can help you immensely when taken care of properly, or it can hurt you terribly if you don’t know how your score will be affected by opening, closing, and using credit cards.
Let’s look at all of the factors that are used to calculate your credit score and how credit cards can boost or hinder your score. The scoring for FICO scores is very similar among all three major credit bureaus – Experian, Equifax, and TransUnion.
Payment History – Payment history is a record of how often you paid your monthly bill on time and how many times you have missed or been late on a payment. It is the biggest factor and accounts for 35% of your score. The more promptly you have made payments, the better.
Credit Utilization Ratio – Your credit utilization ratio accounts for your current usage of credit and your available amount of revolving credit (i.e. how much of your available credit you use on a regular basis). This accounts for 30% of your credit score. The lower your ratio, the better.
Credit Age – Credit age consists of two separate factors: the age of your oldest account and the average age of all of your accounts. This makes up 15% of your credit score. The older your accounts, the better.
Number/Mix of Accounts – The total number of credit accounts you have and the types of credit you currently have are important. It takes into account installment loans, like auto loans or student loans, and revolving credit accounts, like credit card accounts. This accounts for 10% of your credit score. The more accounts you have and the broader the mix, the better.
Credit Inquiries – This is a record of the number of inquiries on your credit report. Soft inquiries do not show up on your credit report, but hard inquiries do. This accounts for 10% of your credit score. The fewer credit inquiries you have, the better.
As you can see, there is only one category that directly correlates to the number of the account you have, and it only makes up 10% of your score. But all of the other categories can be indirectly affected by the number of credit cards you have.
When it comes to payment history, if you have more accounts, then you can have more payments shown in your credit history. If you are responsible with your credit cards and make the monthly payment on time, this will help you over time. However, if you have a tendency to forget to pay your card or pay late, more cards could potentially hurt your score.
Your credit utilization ratio should ideally always be under 30%, but it is even better if you can keep it under 10% every month. Although you always have the ability to keep your ratio low regardless of the number of cards you carry, it can be easier to do if you have more revolving credit among multiple accounts. For example, if you spend $1,000 a month on credit cards but only have one credit card with a $2,000 credit limit, your ratio is 50% and is way too high. If you opened another account with another $2,000 credit limit, without putting any extra charges on your cards, your ratio would drop to 25%.
Your credit age can also be affected indirectly by the number of credit cards in your wallet. If you are regularly opening new credit cards, and thus have a higher number of cards, you will slowly decrease the average of your accounts, potentially hurting the 10% used in your score calculation. The one constant that doesn’t get affected is the age of your oldest account; so long as you keep your oldest accounts open indefinitely, you shouldn’t get hurt too much. Banks like to see a longer length of credit history.
Lastly, if you open new cards on a regular basis, you will most likely have hard inquiries on your credit reports. Inquiries only affect your credit score a bit in the short term – for about three to six months – but have less effect over time. If you already have a lot of credit cards, or just a few, but don’t open cards on a regular basis, you won’t notice any difference.
Reasons to Have Many Credit Cards
A lot of old-school opinion on plastic is that it should be avoided at all costs; the thinking is that you should have only one credit card to help your credit score, but that any more could lead to financial ruin. For some people that could be true, but there are multiple reasons to have more than one credit card – if not many cards.
First off, not every merchant and business accepts all cards from the major credit card networks – Visa, American Express, Mastercard, and Discover. Some cards are more widely accepted, while others are accepted much less often. For instance, you will most likely see that American Express is missing from the list of accepted cards more than the other three. If you carry around at least one credit card from every major credit card network, you will always be able to pay with a credit card.
You may have a single credit card that earns you cash back or miles toward an airline loyalty program. While it’s good to earn rewards, you may be missing out on a lot more if you use the same card for every single purchase. If you have multiple rewards-earning credit cards, you can pick the card that will give you the most value back every time you swipe or insert.
A single credit card will reward you on the purchases you make in one or two particular categories, but many of the purchases you make will only earn one point, one mile, or 1% cashback. If you have multiple rewards cards, each of which offers some kind of bonus points or cash back in different categories, you will be rewarded significantly more on every purchase you make.
Each card you have will have different perks and rewards structures as well. Cards can have different benefits, like no foreign transaction fees when traveling abroad, flexibility in points or miles redemption, and free credit scores, among others. You can diversify your rewards by having an airline credit card, a hotel credit card, a cashback credit card, and a card that offers the ability to transfer your points or miles to multiple airlines and hotel loyalty programs.
As mentioned before, having multiple credit cards can also help your credit score by lowering your credit utilization ratio, increasing your number and mix of accounts, and giving you more opportunity to build an on-time payment history. If you are worried that you will have too many cards in your purse or wallet, you can always keep the cards you rarely use in a safe place at home, that way those cards can continue to build your credit age and history over time.
Reasons to Have Fewer Credit Cards
Just because there are some good reasons to have multiple credit cards, that doesn’t mean that everybody should start hoarding as many as they can carry. There are perfectly good reasons to limit the number of credit cards you own as well. It’s true – if not handled properly, credit cards can be dangerous to your finances.
One of the primary reasons to not open too many credit cards is annual fees. Not all credit cards have annual fees, but the ones that tend to offer the best rewards, perks, and cashback deals tend to have an annual fee included. Annual fees can range anywhere from $50 to $750 – with multiple cards, the cost of having those cards can really add up. Annual fees aren’t always bad and the rewards earned each year on the card should be worth more than the fee. But if you don’t like the idea of paying to use the card, you will want to limit the number of cards you have with annual fees.
The more credit cards you have open at a given time, the more time and energy you will need to put into keeping track of payment due dates, minimum payments, and dealing with different banks and credit card issuers. Sometimes keeping things very simple can be much better. Having many credit cards can increase the risk of forgetting about paying one of your bills or paying it late, thus hurting your credit.
You don’t want to be in a position where you have too many things to track, make a simple mistake, and end up worse off down the line. The high-interest rates on credit cards make credit card debt the worst kind of debt. You don’t want to carry over a balance from month to month if you can avoid it.
Your Specific Situation Matters
As you can see, the magic number of credit cards is not an easy thing to identify. It depends on the situation of each individual, their credit score, their goals, and their habits around money. If personal finance is not your forte, you might opt for fewer cards. If you want to travel and fly around the world for free, then multiple travel rewards cards might be ideal.
You will need to assess your personal situation and what is comfortable for you. Although we can’t say for certain how many credit cards you should have, here are some guiding principles and situations:
- If you are in the unfortunate situation of having sub-optimal credit or none at all, your best bet is to stick with one credit card to start building your credit history, specifically a secured credit card. These cards can help you build credit and improve it over time. Once you have developed good credit, then you can transition to unsecured cards and start opening more.
- If you tend to overspend when out shopping, then you will need to be extra careful with your credit cards. You should have at least one card open to keep building your credit history, but you might want to lower the credit limit on the card to prevent overspending. If you don’t think you could handle not using your credit card, there is a point where you should avoid credit cards altogether and cut them up.
- If you have a solid history of on-time payments, have good credit, and can manage your finances well, then you have the freedom to decide how many cards you want. There is likely a happy medium, probably in the range of three to six cards, in which you can maximize your cashback and travel rewards without paying an arm and a leg in annual fees.
- If you are in the fortunate category or having great to excellent credit and love the idea of lucrative cashback and traveling the world for a fraction of the price, then you can open as many credit cards as you like. You will still want to make sure you are comfortable with the annual fees you pay, and you should keep a close eye on your credit score each month.
So, when it comes to how many credit cards you should have, it is really up to you. Your particular circumstances will dictate your ideal number. Be sure that you are comfortable with the amount of plastic in your wallet, but don’t short change your rewards with too few cards either. Above all, keep close track of your credit score and make sure that your decision to use a credit card will help you rather than hurt you.