Credit Cards: Is One Enough or Do You Need More?
For anyone who has experienced credit card debt, the decision to have even one credit card can lead to feelings of anxiety. However, while credit cards are easy to abuse, the little pieces of plastic do play a vital role in rebuilding and establishing credit.
The American Bankers Association recently estimated that approximately two in three Americans own at least a single credit card. If the estimate is accurate, that means there are over 350,000,000 open credit card accounts in the U.S.
While most Americans own a credit card, that does not mean ownership is right for you. Determining the value of a single credit card or multiple cards means weighing the pros and cons of ownership. It also means examining your ability to manage multiple accounts.
Your Credit Score and Multiple Credit Cards
One of the primary concerns of opening multiple credit card accounts is its effect on your credit score. While people often assume that multiple cards can result in a lower credit score, the opposite is often true, especially with good management skills. Owning multiple cards can keep your utilization ratio low, which ultimately boosts your score.
If you have a single card with a limit of $2,000, and each month you charge $1,800 — even if you pay that debt off every month — credit bureaus will assess your utilization ratio or credit usage at 90%. The high percentage will impair your credit score. However, if you have three cards totaling a $6,000 limit, the regular $1,800 per month charges only account for a usage rate of 30%.
Most experts recommend you use no more than 30% of your available credit per card. Therefore, by spreading your average monthly charges of $1,800 over three cards, you stay within advised limits and improve your utilization score, which can improve your credit score. However, utilization is only one factor in determining your FICO credit score, with payment history being the most significant. FICO also warns that opening multiple accounts to increase your available credit can backfire, potentially lowering your score.
The Magic Credit Card Number
Unfortunately, there is no secret number of credit cards for superior credit ratings. The ideal number is the amount that most benefits you and that you can manage. Most financial experts recommend people have at least one card to take advantage of the benefits, convenience, and security. The argument for multiple cards is focused on your monthly discretionary budget or card rewards, like airline miles, points, and cashback offers.
However, the rule with credit card ownership is responsible usage. Never use a card for extravagant purchases that are not within your monthly budget or planning. Credit limits are valuable tools for demonstrating your financial responsibility, and cards can help improve your credit score and demonstrate creditworthiness. Still, they are easy to abuse, potentially leading to overwhelming and devastating debt. Therefore, you should only have as many cards as you can manage, typically one and no more than three.
How many credit cards do you feel someone should have? Leave a comment explaining your thoughts.