One of the most popular questions in personal finance is “how many credit cards should I have?” Surprisingly there really isn’t a perfect answer due to the complexity of credit and the diversity of individual situations. On a similar note, while there are certainly people who should stay away from adding more credit cards to their collections, others could actually benefit from a new card.
From earning better rewards and saving money to potentially increasing your credit scores, there’s good reason to consider applying for a new credit card. If you’re on the fence, here are a few questions to ponder.
How much do you spend each month?
Contrary to popular belief, paying for everything with a credit card is not inherently bad. What is bad is paying for everything with a credit card and then carrying over the balance. However, if you pay off your balance consistently on a monthly basis, utilizing your card as much as possible is not only acceptable but could serve to earn you more rewards (more on that in a minute).
With that said it is important to consider your credit utilization ratio. For example, if your card holds a $5,000 limit and you spend $3,000 in a month on average, your utilization rate of 60% would be considered high and could hurt your credit scores. While you may be able to request a credit limit increase to help prevent this problem you might also want to consider getting an additional card. That way you can split your purchases among multiple cards while being mindful of the limit on each. FYI: ideally you should keep your utilization below 10% but below 30% is still considered “good.”
How are your rewards?
Many different cards offer rewards in their own way, be it under a point or a mileage accrual system or a straight cash back percentage. Because of this there may be an opportunity for you to save even more by adding a new card to the mix even if you’re happy with your current perks. For example Dyer News columnist Kyle Burbank decided to obtain the Discover It card to compliment his wife’s existing rewards card that only offered strong cash back percentages in certain categories. Overall being strategic about which card you use for different categories of spending can help you maximize your rewards, thus justifying the addition to your wallet.
What is your interest rate like?
While I will state again that the best way to utilize credit cards is to pay them off monthly, there are certainly cases where that isn’t exactly an option. In fact you may have already racked up some debt on your credit cards that you are now paying a hefty premium on as a result of interest. If that’s your situation you may want to look for a card that not only has a better interest rate overall but also offers a 0% interest introductory rate for balance transfers.
Basically balance transfers are a form of debt consolidation that will allow you to move the amount you owe on one card to a new card. Often times credit card companies will even allow you to pay zero interest on that balance for a short period of time. This means, if you can pay down your balance in the time allotted, you could save a significant amount of money. Just be mindful that there may be a balance transfer fee to consider in your calculations and you will want to ensure that you pay off your debt before the promotion expires in order to make this tactic worth it.
A word of warning on credit scores and closing accounts
You may have heard that opening a new credit card or even applying for one can cause a blemish to your credit scores. While that is true in some cases, these negative effects may also be offset by your increased credit limit, which plays a bigger part in determining your FICO scores. What will actually cause more damage is closing your old credit card accounts after you get your new card.
In addition to lowering your available credit, closing your accounts can affect your age of credit, which is also a factor in your scores. If all of your cards are newer, this might prove a red flag for creditors and that implied risk will be reflected in your credit scores. If you’re not sure what the best course of action is in regards to closing an old card or account, Credit Karma offers a helpful tool that will estimate how your scores will be impacted by your decision. This could be also helpful if you’re still concerned about the potential effects of opening a new card overall.
Despite what you may have heard, there really isn’t a magic number when it comes to how many credit cards one person should have. What’s more important is that you use them responsibly and use them to your advantage. If you’re not getting the most out of your cards it may be time to see what else is available to you — it could end up saving you money and helping your credit scores in the long run.