Having more than one credit card is typical for Americans, but how many is too many? The answer to that question is not a simple number.
Determining the right number of credit cards for your financial well-being requires assessing a few factors. Whatever number of credit cards you decide to have, the most important thing is to make your credit card payments on time.
How Many Credit Cards Should I Have?
The average American has 3.4 credit cards, according to a 2016 Gallup poll on debt. And nearly 31 percent of Americans use credit cards as their primary payment method for everyday purchases, according to a 2017 study on consumer spending by TD Bank.
The number of credit cards you have or should have, however, is less important than the credit score or credit utilization ratio you need to achieve your financial goals, such as qualifying for a home loan. The Gallup poll results showed that 83 percent of baby boomers and 65 percent of millennials use credit cards, but whether people can afford to use them or are using them strategically is a separate question. The average credit card debt for 2016 was $5,551, according to Experian, and with interest rates ranging from single to double digits, depending on the borrower’s credit, that debt can become expensive.
How Credit Cards Affect Your Credit Score
It’s essential to pay your credit card bill on time because late payments can negatively affect your credit score. Another aspect of your credit score you should know about is your credit utilization rate.
Your credit utilization rate is the amount of credit you’re using divided by the amount you have available. For example, if you have $10,000 credit available on two cards, and a balance of $5,000 on one, your credit utilization rate is 50 percent because you’re using half of your total available credit.
Beware of closing unused accounts. Using the same example as before, if you closed the zero-balance account, your credit utilization ratio would jump from 50 percent to 100 percent. Having a low credit utilization rate can make you a more attractive borrower and can help you improve your credit score.
When you apply for a credit card, the bank or company will make a hard inquiry on your credit report. A hard inquiry might lower your credit score a few points because looking for new credit can equate with higher risk, according to myFICO, which provides FICO scores and credit reports. But having long-term credit can reflect positively on your credit report if you have established a record on making on-time payments and using your credit responsibly.
Choose the Right Credit Card
If you carry a balance on your credit cards, you’re not alone. Forty-five percent of people who use credit cards don’t pay their bill in full every month, according to the TD Bank survey. If you’re one of these people, look for a card with a low interest rate so you can pay off your balance faster and pay less in interest overall.
If you charge a lot regularly and pay off your bill every month, choose a credit card that offers rewards. Some cards offer you cash back based on a percentage of how much you charge, and others give you points. Fifty-six percent of people report that their primary card provides cash back rewards, according to TD Bank. Choosing a rewards credit card enables you to get something back from purchases you would make anyway.
How Many Credit Cards Is Too Many?
Once you know how to get a credit card, think carefully about the way you’ll use it. If you want to apply for a card because the ones you have are maxed out, you should probably take a look at your spending habits. Using your credit cards an an extension of your income and not being able to pay down your balances are signs you’re not living within your means. This kind of spending pattern can make it difficult to get out of debt.
Base the number of cards you carry on your personal financial situation. A good guideline is to make sure you can keep each card’s balance within a manageable range and make more than the minimum payment every month. Your credit cards should work for you, not make you work for them.