How Many Credit Cards Should You Own?
Opening a credit card account is no small matter. Not only will it affect your credit report for years to come, but the probability of it affecting your finances is relatively high. This does not mean you should refrain from opening new lines of credit when a great offer comes along, but rather, each move you make regarding credit should be carefully planned to maximize your benefit while mitigating risk.
There is no exact number of credit cards that anyone is expected to own. Your personal discipline and ability to handle money should serve as a guide when determining how many lines of credit you should engage with at any time. Having a stable of five or more credit cards, or a mixture of cards and other lines of credit, will improve the calculation of your credit score, though juggling that many accounts can result in late payments should one of them slip your mind.
The following information will further assist you in choosing the ideal number of cards and other lines of credit. Keep in mind that the picture changes noticeably when you own a business or have recurring financial responsibilities to attend to. The goal is to maintain flexibility with your finances while not biting off more than you can chew in any given month.
Is There a Minimum Number of Credit Cards You Should Have?
Before we can discuss the optimal amount of credit lines to maintain, it is important to realize that there are some penalties for holding too few open accounts at once. Typically, the credit bureaus will consider you a thin file should you have less than five active lines at any given time. Credit lines include charge cards, business loans, mortgages, vehicle financing, and so on.
When you hold fewer than five of these accounts, the main credit bureaus cannot accurately calculate your score due to the lack of data and history under your name. This may seem unfair to young people first starting out; however, lenders are indeed taking on more risk when borrowing money from a relatively unknown client. Luckily, building a profile with at least five lines of credit is pretty easy over the span of a few years. The trick is to carefully select when to open a new account.
Other Effects of Having a Thin File
Since each action you take regarding credit will affect your overall score, having fewer active accounts means each action weighs more heavily each time the credit bureaus reassess your standings. For instance, you typically want to utilize less than 30% of your total credit to maintain a good rating in that category. A person with only $3,000 of credit will be severely penalized for using more than a grand to pay off expenses. Contrast that with someone with $30,000 of credit who can utilize almost $10,000 before their rating falls.
Of course, being able to spend more puts you at risk of getting into debt that may prove difficult to climb out of. Mistakes may affect a thin file’s credit score more noticeably, but at least you can rectify any issues that much faster to compensate.
What Is the Ideal Number of Cards for You?
The number of credit cards you should hold is determined by some personal attributes and your ability to manage finances responsibly. The simplest factor to consider is age. You need to be at least 18 years old to sign up for a credit line, and even then, your chances of being approved will take a hit until you are at least 21. Again, lenders wish to mitigate risk, and younger clients are naturally less predictable than someone with many years of adult experience.
On average, Americans tend to hold four credit cards at once. This is a good starting point to reference before looking at your overall financial organization and level of responsibility. Be honest with yourself and ask if you are more or less responsible with money than the average person. If the truth is that you struggle with personal finance, then limiting yourself to a card or two is wise.
Should you have the ability to pay all your bills on time by staying organized, then there is no precise limit to how many credit cards you can eventually accrue. As the number of lines and total credit amount increases, your score will grow in response. This means you can continue to add quality cards to your roster as long as you space out the applications in a strategic manner. Let’s discuss how to do that while also pointing out some of the extra steps you can take to keep all your payments on time.
Things to Consider About Having Many Credit Cards
Your overall credit score will increase as you successfully open new lines of credit while keeping all your existing accounts in good standing. However, the more cards you activate, the more considerations you have on your plate each month.
Spacing Out Credit Applications
Applying for a credit card will place a hard inquiry on your credit report that will slightly decrease your score for a short duration. This penalty is fairly insignificant, provided you only apply for one credit card at a time. Attempting to open multiple new accounts rapidly will send a red flag to the credit bureaus, who will grow suspicious of your current financial situation. They will likely assume you are having trouble paying your bills, hence the need to hastily open new cards. Considering that credit scores are calculated via computer algorithms, you will not get a chance to explain the situation before your score is severely diminished.
To avoid such penalties, you should wait at least six months between credit line applications whenever possible. This spaces out your hard inquiries in a way that will have minimal effect on your credit report. It is not a race to maximize your score, so practice patience and gradually improve your metrics over the course of several years.
Timing Major Purchases
With the above knowledge in mind, you will want to avoid making any large purchases within six months of applying for credit cards. You will likely need a loan to purchase a home or start a business, so carefully plan your transactions to avoid overlapping any of these major life events. The same goes for vehicles and other big-ticket items you choose to finance.
As a bonus for those of you with a great credit score and a high degree of financial prowess, consider taking advantage of sizable cash-back promotions when applying for new cards as well. Instead of financing that new home theater setup, applying for a new credit card specifically to buy the equipment may be your best bet. Plenty of cards offer several hundred dollars cash back on $1000+ purchases and charge zero interest for 12-18 months. If you are fully confident that you can pay the card in time, this is a great way to make a large purchase and acquire a new card in the same six-month window.
Handling Each Billing Cycle
The more cards you juggle, the more payment dates you will see each month. Your chances of missing a payment also go up, especially if you hope to remember each due date yourself. Fortunately, numerous finance and credit monitoring apps help you keep track of payments. Most banks and credit unions also offer automatic bill payments. These are excellent options for people with more than enough income or savings to pay in full each month. Be sure to monitor your bank statements to have an idea of how much cash is being transferred out by automated systems each month.
The Impact of Multiple Cards on Your Credit Score
Each new line of credit you open introduces more moving parts to your report from the bureaus. Here are the key ways your score is affected by holding many cards simultaneously.
Age of Credit
The average age of all your credit lines plays a crucial role in determining how risky of an investment you are in the eyes of lenders. This means you would rather not close any old accounts simply because you are not actively using them. Keeping them on will increase your average age and improve your odds of receiving new cards you apply for. However, closing accounts can be wise if you receive awful service or you wish to stop any hidden fees from piling up.
Credit Utilization
Keeping your credit utilization between 10% and 30% will give your score a nice boost. Of course, each new card you open means there will be more to calculate when determining if you fall within the sweet spot. A new card may be just what you need to lower your utilization percentage to below 30%. Just remember to keep making those payments on time and avoid accruing more debt than you can clear on sudden notice.
Payment History
Payment history will affect your score for several years, so the best solution is to never miss a payment in the first place. If your payment history drops below perfect, adding more cards can bring your on-time payment percentage closer to 100. However, closing an account will not erase any previous penalties, so mistakes in this category can only be healed with time.
Make Your Next Loan a Good One
With all that said, responsibly opening lines of credit is an effective way to improve your life and finances in the long run. For instance, a business loan can dramatically change a person’s future for the better. At American Business Credit, we help you get your dream project off the ground. Whether you wish to start a restaurant, a homestead, a commercial venture, a veteran-owned establishment, or something else, we have loan options that will suit your needs.
Fill out an application today to get connected to the funds necessary to make your dreams come true. By using the above tips, you can perfectly time your credit application to have a minimal effect on your credit score and financial situation.
