How many credit cards should you have? Will you be penalized for applying for another credit card? The answers to these questions are a frustrating “it depends” and “not necessarily.”
First, it depends on how disciplined you are in spending money and managing your payments. These are important considerations not only for your comfort and financial well-being, but also for the agencies that are monitoring your credit and constructing your FICO® score.
Read on to find out whether it makes sense for you to have more than one credit card.
Many people can successfully manage multiple cards
Cardholders with the highest credit scores have about four open credit card accounts, while those with the lowest scores have no more than three, according to the Bureau of Consumer Financial Protection.
Having more cards could improve your credit score
An important component of your credit score is what’s called the “credit utilization ratio,” which can impact up to 30% of your credit score. The ratio compares the amount of credit you’re using on your cards to your overall available credit. The more credit you have and the less of it you use, the higher your score will tend to be.
Overall, you should seek to carry a balance that amounts to less than 30% of your total, available limit. For example, if your credit limit is $5,000, you’d want to try to keep an average balance of no more than $1,500. Having just one or two cards may mean your credit utilization is relatively high, and that weighs on your score. (Keep in mind that activity on your debit card, even if it carries a Visa® or MasterCard® logo, does not impact your credit history or score.)
This will become especially important starting in summer, 2020, as FICO has announced that it will apply new credit scoring models that are expected to positively impact—by as much as a 20 point increase—those with a score above 680 who continue to make on-time payments and use 30% or less of their available credit each month, according to Debt.org.
Conversely, those with a score under 680 who miss payments and spend close to their credit limit each month could see their scores drop by as much as 20 points. The new scoring system will also take into account your historical usage of credit. If you have steadily reduced debt over the last two years, your score should go up. If you’re steadily adding debt, it may drop.
Applying for a new credit card, as most people know, entails a “hard inquiry” of your credit score. That in and of itself can lead to a small dip in the score. However, this is more than compensated for over the long run by the benefits of maintaining higher credit. However you shouldn’t significantly increase the number of cards you have in a short period of time. Rather, space out each application by at least several months. And don’t continue applying for new cards if you’re getting rejected.
3 good reasons to get a new credit card
- Having more than one card increases the credit you have available and will lower your credit utilization in a favorable way if you maintain your good spending habits and pay off your balances (or keep them low).
- The diversity of credit providers counts in your favor. Having various kinds of cards with a good record of payments tells prospective lenders that you have been vetted and considered creditworthy by several institutions. You should have a good reason for getting each card—because of its rewards program, cash back, affinity, bonus awards—but avoid running up purchases simply to accumulate rewards.
- You can use different cards for different purposes. You could use a card from your community bank or credit union for daily purchases, an airline rewards card for large purchases that earn lots of points, a card for business expenses, just to name a few. For example, With the NEA® Cash Rewards Card, you can tailor your rewards based on your personal situation and spending plans. You can earn 3% cash back in any one of six categories—gas, online shopping, dining, travel, drug stores, or home improvement/ furnishings—and you can change the category once a month. Plus, you’ll earn 2% cash back at grocery stores and wholesale clubs, and 1% on all other purchases. Earn 3% and 2% cash back on the first $2,500 in combined purchases each quarter in the choice category, and at grocery stores and wholesale clubs, then earn unlimited 1% thereafter.
You’ll want to keep each card active enough to stop the issuer from reducing credit or closing the account. And before closing a credit card account, keep in mind that it will lower your available credit and may raise your credit utilization, with possible negative consequences for your credit score.
Keeping payments current is important, as is checking statements carefully (easier when everything is online), keeping balances low—and limiting the number of accounts to however many you can manage in this way.