How many credit cards should you have and how many is “too many”? Do you feel like having two, three or even five credit cards is way more than you need?
Well, Walter Cavanagh would certainly disagree with you. After all, the man has a whopping 1,497 credit cards in his collection.
While having over a thousand credit cards might be a burden on your wallet, having one credit card only isn't enough. In this article, we'll tell you why you need to have multiple credit cards and why having only one will hurt you in the long run. Let’s dive in.
Most people think that having multiple credit cards negatively impacts their credit score. This couldn't be further from the truth. Before we can explain why let's look at these two scenarios.
In the first, you have one credit card with a $1,000 limit. Let’s say that on average, you usually charge around $900 every month. This brings your debt utilization ratio to 90%.
In the second scenario, you have a total of 3 credit cards each with a limit of $1000. If you charge the same $900 but spread it over the three cards, it brings your debt utilization ration for each card to 30%.
One of the factors that determine your credit score is how high or low your debt utilization ration is. Debt utilization refers to how much of your available credit you use.
A high ratio tends to lower your credit score. It doesn’t matter if you diligently pay off your credit card balance at the end of every month.
That’s just how the credit score system is set up. So, you can immediately see the benefits of spreading out your monthly expenditure over multiple credit cards. As a rule of thumb, you should limit your credit utilization ratio to not more than 30% per card at any given time.
If you’re thinking, “Should I get a credit card just for the rewards?” The answer is a resounding yes!
Here’s the thing. Different credit cards offer their customers different types of rewards.
This means that if you have multiple credit cards that have running offers or promotions, you might actually end up saving loads of cash in the long run. For instance, credit card A might offer customers a flat 2% rollback on all purchases made using that card.
Ideally, this should be your default card. Unless of course credit card B has an on-going promotion that offers 4% rollback on purchases in specific categories. These could be plane tickets, hotel bookings…etc.
In that case, it makes sense to use credit card B to make those specific payments for the duration of the promotion. Once it's over, you can revert to using your default credit card A.
You might have another credit card C that offers you 3% cash back on gas every single month. Another credit card D might give customers 5% cashback on gas in the months of December and January.
It would then make sense to use D for those 2 months of the year and C for the remaining 10 months. You get the idea.
If you’re also wondering, “How many credit cards is too many?” Well, if you’re having a hard time keeping track of them, you need to cancel a few. You might accidentally forget to pay for one or worse still end up losing it which would be a zero-sum game if you were trying to save.
If a credit card company detects unusual activity in your account the first thing they’ll do is freeze it until they can verify that activity. This can pose a problem if you were in a different province or country altogether and you’re unable to complete your transaction.
The best case scenario is you get on the phone with your credit card company and explain to them that it is indeed you who is using your credit card in Malaysia and that it’s not stolen. However, this process might require you to divulge sensitive verification information which you can’t very well do when you’re holding up the line at the cash register.
This wouldn’t be much of an issue if you have another credit card you could use to complete your payment. In the worst case scenario, the credit card company might end up canceling your card and closing your account if they suspect that there's fraudulent activity going on.
They may issue you with a new account number and mail your credit card to your on-file address but that would take a couple of days, at least. If that was the only credit card you had, well, you’d just have to wait patiently and refrain from making any purchases. You could borrow money from a family member or friend in the meantime.
However, a discrete way to handle the situation would be to use any of your other backup credit cards. The other possibility would be if your credit card was stolen or ended up lost or misplaced. Having at least two other credit cards stored in a safe place means that you always have a backup if anything like that ever happened.
Ideally, credit cards shouldn’t be your go-to in case of an emergency. Endeavor to have some money put aside in a savings account that would be able to cover an emergency if the need ever arose.
A rainy-day fund should have enough money in a liquid account that you have easy access to if an unforeseen circumstance was to ever crop up. But, an emergency wouldn't be one if you saw it coming right?
If for whatever reason, you don’t want to deplete your savings unexpectedly it’s a good idea to have one credit card put aside for emergencies. Get one that has a high limit with little to no annual fees and a low-interest rate.
Having multiple credit cards can be a great way to use rewards by optimizing every purchase you make. What’s more, you benefit from getting loyalty points or miles that you can redeem in the future.
However, keeping track of all these reward programs can be a bit of an uphill task. While having multiple credit cards has a positive impact on your credit score, having too many of them could leave you nursing the effects of their dire financial consequences.
There are other factors you need to put into consideration in order to determine if having a particular card makes sense for you. The first thing you’ll need to think about is the multiple fees involved.
Remember, all credit cards require you to pay an annual fee to keep using them. Having too many cards means you have to pay annual fees on all of them.
So how many credit cards are too many? This is where you have to put your thinking cap on and do some financial planning.
You need to establish if the fees you pay on each card are more than the rewards and savings you get from said card. If you find that the fees eat into the reward, that’s a card you need to discard. Only keep the cards that make financial sense.
Next, you need to take into account that having too many credit cards spread over multiple accounts makes it difficult to effectively track your expenditure. This might put you at a higher risk of missing a payment especially if you haven’t enabled auto-pay on your account. Setting up auto-pay, on the other hand, means that you always have to make sure each of your accounts has enough money to settle your card payments in full.
The benefits of having multiple credit cards definitely outweigh the cons. But, you need to have a high level of self-discipline and financial management skills to reap their benefits.
If not, having more than one credit card can quickly turn into a liability. You could run into unprecedented and avoidable debt.
So, how many credit cards should you have? Three is a number that makes sense.
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