Americans paid down some $83-Billion in credit card debt in 2020, but did not necessarily close their accounts. Nor should they have. A certain amount of available credit is beneficial on your credit report, and can help you qualify for better deals.
According to a Credit Karma report, the average American has 2.5 credit cards. Some have two; for others, it’s three. Of course, outliers may have more or less. The number is all over the place, which raises the question–how many credit cards should I have?
There’s no perfect answer like so many other things in life because personal finance is personal. However, you can use some essential criteria as a guide.
How Many Credit Cards Should I Have?
A magic formula to calculate the number of credit cards you need doesn’t exist. Credit cards have many benefits like cashback, travel points, and building credit. However, the need for a credit card depends on your financial situation and spending habits. Therefore, you must consider your income, ability to pay bills on time, budget, and money habits.
Having multiple credit cards comes with a lot of responsibility. After all, it’s not free money. Your ability to budget and live within your means are strong indicators of your ability to manage credit wisely. Credit cards can end up costing you more in the long run and significantly impact your long-term financial goals if not used properly.
For some people, having one credit card is enough. It allows them to build credit, earn rewards, and track their spending while paying off each month’s balance. For others, it could be three credit cards.
Of course, some people prefer not to have a credit card. They don’t like the risk of missing a payment or out-of-control spending that can be associated with credit cards, or perhaps, they’ve had a bad experience in the past.
Is There A Such Thing As Too Few Credit Cards?
There’s no punishment for not having or using a credit card. However, credit cards can help build credit. Unfortunately, banks are hesitant to loan money to someone who hasn’t proven to pay back debt in the past.
High utilization rates are a problem for people with only one or two cards. If you don’t pay your credit card balances on time, you run the risk of looking like you’ve maxed your credit line. Think about this. If you own two cards with a combined maximum credit limit of $10,000 and acquire a $5,000 balance, you’ll have a 50% utilization rate. On the other hand, if you have four credit cards with a combined maximum credit limit of $20,000 and acquire a balance of $5,000, you’ll have a 25% utilization rate.
While neither of these utilization rates is optimal, a 25% utilization rate appears better than 50%. It may be more challenging for creditors to judge your creditworthiness when you don’t have much experience with credit. At the same time, having too many cards can be problematic.
How Many Credit Cards Are Too Many?
We don’t have a perfect number of credit cards to have. So, we don’t know how many are too many. But, whatever that number is, we do know too many isn’t a good idea.
You might be aware already that opening too many credit cards close together can negatively impact your credit score. However, there are a few other problems that may arise.
Credit cards require monitoring. It’s something extra to track in your budget and set up for bill pay. In addition, you increase your chances of spending more than you intended when using credit cards.
As you’re building your wallet of credit cards, ask yourself the following questions to help you determine if you have too many:
- Can I track my credit card spending properly?
- Will I pay the balance in full for each card before its due date?
- Will I lose money by paying too many fees?
Good Practices for Credit Cards
There’s nothing right or wrong with owning a credit card. It’s personal. Just keep in mind, cards work for some people and don’t for others. So, if you use a credit card, be sure to do it wisely. Credit can enhance your financial situation or destroy it.
Here’s a list of good credit card habits to build:
1) Use a budget. Use your budget to track credit card spending by category. Don’t spend more than you plan to pay back at the end of the month.
2) Pay the monthly balance before the due date. There’s no rule that you have to pay the balance on the due date. Instead, pay the money back to the credit card as you spend it. This way, you see the money leaving your primary checking account just like using a debit card or cash. If you don’t like the idea of logging in every day, set a goal to pay the credit card balance weekly.
3) Check your credit score regularly. Pay attention to your credit utilization and credit score with credit reporting agencies like Experian, Transunion, or Equifax. You may need more credit one day. So, you want to make sure you’re managing it well.
4) Maintain a low utilization rate. Don’t max out your credit card balances. Instead, pay them off as you accrue them to keep your credit score up.
5) Minimize the frequency of opening new accounts. Have a plan for your credit. Don’t open accounts just to open them and keep track of the ones you have. You need to pay attention to the credit in your name. Opening accounts frequently can harm your credit score, hurting your financial situation later.
6) Look for cards with no annual fee and low-interest rates. Building your credit with a credit card is acceptable. However, you don’t want to pay more than you have to. So stick to cards with no annual fee and low-interest rates.
7) Avoid cash advances. Even if paid back early, a cash advance comes with extra fees. So, avoid them for simplicity. Instead, only spend the cash that you have.
The Bottom Line
Credit cards are helpful for a variety of situations. For example, they’re convenient and may earn you rewards. However, the opposite can be true in some cases. They’re one more thing to think about every month and one more bill to pay. So, do you need one?
It’s a personal decision based on your financial situation and money habits. Not owning a credit card is acceptable. In other cases, holding three cards works best. It comes down to your ability to pay them off without owing interest and keep your spending in check.
Regardless of the number of credit cards you have, don’t forget to follow good credit card practices to build good credit, maximize rewards, and minimize credit card expenses.
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