College Students

How Many Credit Cards Should You Have?

EPF Last Update: June 7, 2020

When you try to build your credit up, one of the most difficult things to figure out is how many credit cards you plan to have. This is a decision that must be made ahead of time — even if you’re not planning to apply for all the cards right away.

We’re going to try and explain all the different ’cause and effect’ scenarios that come about when managing the amount of credit cards you own.

The Cost of Insufficient Credit

The average American’s credit score is 706 as according to our study.

A diminished score makes borrowing difficult. Worse still, any borrowing terms that are extended are often expensive with high interest rates. These high rates represent the risk associated with a borrower who doesn’t enjoy a good credit profile.

Nearly every American will need to borrow for large purchases throughout life. Most notable of these expenses is a home.

Consider the difference in a monthly mortgage payment when an interest rate is just 1% greater.

On a hypothetical $200,000 mortgage with a 30-year fixed term an interest rate of 4% will require a $954 monthly payment. Now, imagine you hold a lower credit score, your interest rate is 5% and the monthly payment is $1,073 yielding a total finance charge of $149,000. This is $35,000 in extra financing charges over the life of the mortgage all because of a mediocre score.

The above example assumes a mortgage can be obtained. In many cases the hopeful homeowner doesn’t have a solid enough credit background to earn a mortgage at all. This is a very real problem for many of us.

Even worse, this trend is growing at an alarming rate.

The Urban Institute conducted a broad study on this epidemic. Their findings underscore the problem: “denial rates for applicants with less-than-perfect credit have risen substantially, from 25 percent in 2004 to 43 percent in 2013.” How do we fix this? We fix it by improving our credit.

Many falsely assume that little or no borrowing with credit cards represents solvency and thus increases a credit score. The fact, however, is that no credit history is bad credit history.

Good credit scores are the result of two actions (a) borrowing and (b) repaying at regular intervals on time. Given this fact, is it wise to attempt to boost a score with more borrowing and thus more repayment?

The answer. Perhaps if the consumer has the ability and responsibility to repay. How do we know when more credit cards is the answer and how many are enough? Read on and we’ll answer.

When to Choose More Credit Cards?

Deciding to use a credit score should be the result of one of (or both of) the following goals:

  • To increase your credit score.
  • To save of spending (e.g. points, cash back, etc.).

If you’re goal is to increase your score take caution at the notion of opting for more cards. The number of credit cards in your name will not have a particularly meaningful impact. The factors influencing your credit score include things like:

  • Payment history
  • Debt owed
  • Length of credit history
  • Recent credit
  • Type of credit

A strict card count doesn’t apply here. Furthermore, those needing help with their credit score are likely not skilled at using one responsibly. Adding more cards to the mix will not help the situation. The reporting agencies are focused on your behavior as a consumer, not necessarily your ability to obtain a credit card.

Today, even those with a weak score can get their hands on a credit card, many cards in fact. This makes sense; credit card companies are eager to enable the wild spending of someone who will generate late payment fees and excessive interest rates.

But building credit is a long, multi-leveled game.

More cards make the game more difficult as there is more to manage. There are more invoices, varying terms and different reward plans making the choice of card in a specific spending scenario onerous.

When a consumer gets a new credit card the score can drop slightly. This effect is often short-lived but worth considering. This outcome is even more pronounced when a user engages in “credit card churning” the practice of routinely opening and closing accounts.

The achievement of a superior score comes from playing the game, not attempting to gain the system. All financial goals are achieved with a long-term commitment. There are no short cuts. As a result the decisions you make about your credit cards should be focused on a forward thinking mindset.

With these considerations one must ask, “Is there any reason to own more credit cards.” The answer is yes under specific circumstances. Primarily this is a wise decision for those with respectable credit and responsible repayments. Let’s look at how multiple card ownership can be used by those seeking to rebuild their credit.

As explained above, total debt owed is a major factor in determining your credit score. Holding several cards, each with a significant balance, can boost this metric. The addition of each new card grants the user an incremental increase in their credit limit. The end result might be an improved debt-to-credit ratio. This ratio is expressed as this:

Total Debt / Total Credit Limit

More cards will increase the bottom number (Total Credit Limit) at a faster pace than the top number. This is a way to quickly drive down the total percentage. The result is a superior credit score.

Take caution: engaging in this strategy is dangerous for those without control of their spending. If you simply take on a higher credit limit as a license to spend more the top number will grow thereby increasing the debt-to-credit ratio which is only detrimental to your credit score. Also, your credit score drops (approximately 5 points) with each “hard pull” (hard inquiry) of your credit report, but it’s a necessary evil.

With discipline this method can make a substantial positive impact on your credit score. For the irresponsible it is disastrous. Make sure you know which of these two you are before you attempt. In the short-run it may be best to take a shortcut and request an increase to the line of credit already offered by an existing credit card.

Those with superior credit may also benefit from more cards simply to capitalize on differing benefits. Most credit cards are optimized for one spending category.

Consider juggling these cards for these spending habits:

Groceries: AMEX Blue Cash Preferred

Cash Back: Citi Double Cash Card

Travel: AMEX Starwood Guest

When to Limit Your Credit Card Count?

While closing a credit card account can be a commendable attempt to curb spending there are drawbacks. The primary problem is the inverse of the debt-to-credit metric discussed above. Closing cards will reduce your credit limit thereby adversely impacting your credit score. The only way to mitigate this is to simultaneously reduce your outstanding balance, which is a troublesome goal.

Closing Some of Your Cards

Shutting down some of your cards can be a good idea if your spending is out of control. The reality is that most people will greet an increased credit limit with more spending. Therefore a reduced credit limit will limit your spending.

But when willpower alone doesn’t work it is best to close the door. This resists temptation and simplifies the task of managing your credit. While the short-term result may be a reduced credit score the long-term will be better and less expensive.

Dropping the Annual Fee

There are other savings that come with a reduced card count. Approximately 25% of credit cards have an annual fee. The median fee is $50. Over an array of cards this fee can add up. While this is a small cost in relation to interest payments it is yet another reason to limit the cards in your wallet. In some cases the little piece of plastic in your pocket might be leaking up to $500 a year out of your account. Those with many cards often forget they have annual fees to pay. These fees are only worth the money if the card is delivering something greater in the way of cash back or rewards.

Dealing with High APR Cards

A high APR is a strong argument for closing a card. This is a cost that will dwarf the annual fee problem. If credit cards have enabled excessive spending habits you’re almost certainly paying for this recklessness in the form of a higher interest rate.

The current 3-month trend of fixed rate credit card APRs is 11.06% according to analytics on Variable rates are much higher with a 3-month trend reaching 16.05%.

If you’re experiencing rates above this and are unable to negotiate a better rate consider closing the account. The benefits of various reward point plans and cash back offering will never outpace this expense.

What Happens when You Close a Card?

Closing a card will not erase history.

If payments to a card have been late and irregular closing the card will not make this disappear. FICO will still fold this data into the final credit score. As more time passes the impact of the poor history associated with the closed card will abate.

In choosing to close a card consider starting with one that has the lowest credit limit. Again, the short-run outcome of closing a card is negative. When you decided to reduce your total credit card holding you’re engaging in a prolonged attempt to improve your score.

However, the short-term problems of closing a card can be limited by selecting a card that represents a lesser portion of your total credit limit.

Budgeting for a Balanced Approach

Time to get down to the answer. How many credit cards should you have? Most consumers can meet all their needs easily with four cards.

This allows a user to leverage benefits associated with the four categories that form the core of spending for most which are, groceries, gasoline, travel and all around cash back on total spending.

All consumers spend within these categories. By selecting four cards, which each consolidate their rewards on one of these categories, you can experience ample savings across nearly all your annual spending.

The Concept of Diminishing Returns

The concept of diminishing returns applies here. At a certain point another credit card will not provide added value. The total credit limit offered by an array of four cards is high enough to enable a great debt-to-credit limit even when you are a frequent spender. If you select cards with high limits this effect is even greater.

Four cards usually works well because it offers not just the rewards and credit benefits but also because it is a manageable amount. There are limits to the values we can keep coming in our head. Using more than four cards will exceed your mental bandwidth. This leads to late payments, confusion over limits, difficulty in leveraging benefits and a higher aggregate annual fee.

Take a Look at Your Budget

The best place to start when building you credit card lineup is to carefully review your budget. Why is this an important practice? This will immediately illuminate the bigger areas of your spending.

Additionally, It allows you to use a tier approach.

Tier Your Credit Cards by Budget / Spending Habits

This means you select your first credit card based on the largest sending category in your budget. This first card will become the most active one in your collection and thus should represent the strongest potential benefit.

For many, grocery spending is the largest budgeted category that can be applied to a credit card. The AMEX Blue Cash Preferred card (listed here) offers the best rewards (6% cash back on groceries) on this kind of spending.

A card promising incredible rewards for travel is of little use to a family man with two young children at home. All too often we can be drawn to the promotional aspects of a high annual rate card that is of no value given the stage of life we’re experiencing.

Consider including at least one card in your arsenal that can be characterized as a low interest card. This can be a valuable addition for all the spending that doesn’t fit into the common reward categories.

Some examples include:

Citi Diamond Preferred
21 month 0% APR, no annual fee.

Chase Slate
15 Month 0% APR, no annual fee.

Citi Simplicity
No late fees, no penalty rates, no annual fee.

No matter which cards you choose be sure they all meet some basic requirements including:

  • Low, or no annual fee.
  • Substantial credit limit.
  • Low APR relative to national average.
  • No late fees.
  • Best class offer for a specific spending category.

Finally, do the math; it’s surprising how often this is looked over.

When reviewing your annual spending pay close attention to how the credit cards will defray your costs. If your annual spending on groceries is $6,000 and you card offer 6% cash back on this category your total saving will net out to $261 after accounting for the $99 annual rate.

This means your effective cash back rate at the grocery store is actually 4.35%. If there is another card that offers 5% cash back on this category with no annual fee the choice is simple.

Sometime it takes putting pencil to paper to understand where the value is for your specific spending. 

Tricks for Discussing with Credit Card Companies

The mere fact that you have the option to negotiate with a credit card company is a revelation for many. To start, be sure you fully understand your goal. For the reasons outlined earlier in this article you may wish to request an increase to your credit limit. Perhaps, as a long-time customer with an excellent payment history you want the annual fee waived. Focus on one goal that will make a difference.

Stay on message when speaking to the credit card representative.

Don’t fall into the trap of negotiating with your self by giving reasons why they shouldn’t meet your request. State only the reasons why they should help. Credit card companies understand one thing above all else; it is much easier and less costly to keep a customer than it is to acquire a new one. This is especially true of a good credit card customer.

You can negotiate more than once but be sure to make your biggest request your first. Upon making your first request you can send the message that this is the first time you’ve asked them for anything. This is particularly effective when you’re making a request as a customer that has displayed a good payment history.

Be ready to walk away. The credit card company will initially push back on nearly any request. Your final leverage will be to simply close the account, walk away and step into a new relationship with the competition. Make this leverage real by preparing to make good on this promise.

Thousands of credit cards are available to you. If your request goes unheard you will find another offer that provides what you’re looking for. Have this offer in front of you when calling your credit card company. It will be helpful to prove to the representative that you’ve done the research and know your next step.

Finally, remember that timing matters. A call at 10:00 am on a Tuesday is likely best. The headache of Monday has passed and by 10:00 am the caffeine has taken effect. Later in the day the representative has waged war with dozens before you and is less willing to offer a sympathetic ear to your request.

Ways for Any Consumer to Save Big with Credit Cards

Embrace credit cards. Live and breath them but do so responsibly. The competitive landscape in the credit card world provides numerous benefits to you. Like a Swiss Army knife you simply need to know when to apply the right tool.

Many are unfamiliar with the car rental insurance that is available through many credit cards. Use this to your advantage. Some cards will also offer extended warranties of up to 1 year on purchases. This can be valuable with bigger ticket electronics.

While many cards offer points and cash back on purchases some cards have varying points awarded for purchases at different retailers. For example, one credit card may offer 3 points per $1 spent at Best Buy while 6 points are offered per $1 spent at a retailer like Target. Researches if the points differ based on the retailer and spend accordingly.

Summarizing a Strategy

Take full inventory of the cards you own and their respective benefits and fees. Next, take the time to list your annual total spending among all categories. Compare how your existing credit cards reflect you spending habits. You’ll almost certainly learn that your cards are not aligned with your spending. This is where the real research begins.

Try to stay within the limit of four cards. Having more is not necessarily a problem but be sure you have a good reason to hold more.

If your card benefits don’t reward you for the kind of spending you’re accustomed to consider swapping out a card. You want cards that have rewards that will yield value even as your lifestyle changes. If your ditching a card for any problem that can be solved with a well-timed call to the credit card company be sure to exhaust this strategy first.

Plan Your Spending Around Your Cards!

Favor retailers that have credit card perks that favor you. Take the time to review all the numbers to ensure the net savings among all your cards in aggregate far exceed the costs and fees associated with owning them.

Don’t be swayed by perks that will have little value. Balance transfer benefits are of little use to most consumers. Understand the risks involved. A poor credit score begets a worse credit score.

This can easily become a credit score free fall. Making broad changes to your cards will not yield great value in the short-run. Keep mindful of the long-game nature of credit card ownership to gradually build your score.

While each consumer has different spending habits the main concepts for success are universal. The key is organization and a careful approach characterized by responsibility.

You are the single greatest asset in your drive to achieve value from credit cards. The better you manage your cards the more empowered you become as a consumer and the greater your lifetime savings will be. You will be able to command more perks, better deals and most importantly an excellent rate on all borrowing.

So you know what needs to be done; it’s time to get credit strong!

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