For most grown ups in 2019, owning a credit cards is a common and sometimes necessary part of daily life. Credit cards offer responsible users the freedom to make purchases in an instant and also allow you to make large purchases and pay off your debt as you go.
Credit cards can be a real problem for users who are not financially responsible, however. Large lines of credit can encourage users to spend frivolously and purchase things that they could otherwise not afford. That can lead to spiraling credit card debt which can easily get out of hand. In fact, the total revolving debt in the United States alone has officially surpassed $1 trillion.
Still, despite the risk of potential credit card debt, chances are good you already are own, or are looking to own one, if not several credit cards.
One question you have to ask yourself, is how many credit cards you should own. While the national average of credit cards owned is three, but that doesn’t mean that number is necessarily right for you. Depending on your lifestyle and financial situation, the number of credit cards you own could vary widely.
In order to figure out how many credit cards you should own, or if you should consider taking out another credit card, consider these several questions.
Are you planning on making a large upcoming purchase?
If you are considering buying a new car or a house in the next six months to a year, you should consider avoiding applying for new cards, as this could cause your credit score to dip.
When you open new credit card accounts, it lowers the age of your average account history. On top of that, credit card companies doing hard pulls on your credit to learn about your borrowing history will also momentarily impact your score negatively.
While taking out a new credit card doesn’t cause a big dip to your score – as it makes up only about 10 percent of your total score – you want to do everything you can to get the best rate on a big loan, mortgage, or lease. That might include holding off on taking out another credit card.
Are you responsible when it comes to paying your bills on time?
If you are someone who regularly finds yourself forgetting to pay utility bills, car payments, rent, or other important payments on time, you may want to consider owning one – or no – credit cards.
The same can be said if you are the kind of person who regularly opens up your checking or savings account only to be shocked by the small amount of liquid cash you have at your disposal.
The reason why these kinds of characteristics are not ideal for credit card users is because late fees are one of the major ways credit card users end up owing money to their credit card provider. Late fees and interest fees can lead to hundreds or even thousands of dollars of debt.
If you don’t have any credit cards open and already struggle to pay your bills on time, you may want to opt to just get one so it is easier to keep track of when your payment is due. Credit cards are like most other types of bills where they have monthly payments. With one credit card, it’s easy to keep track. With two or three cards, those due dates can become much less easy to be aware of.
If you already have multiple cards open and are looking to reduce the temptation of adding to your credit card debt, don’t just close your accounts. That will have negative impacts on your credit ratio.
Instead, simply stop using some of your cards. Especially focus on the cards you own with high interest rates, and consider transferring your balances to one or two cards with a low or zero percent interest rate. This will save you money in terms of interest you are accruing and simplify your parents so you can keep better track of it all.
Are you looking to improve your credit score?
The vast majority of credit card holders own somewhere between one and five credit cards, with three cards being the national average, as previously mentioned.
But, you may want more cards than that average depending on your credit utilization rate – that is the ratio of how much credit you have and how much you use.
For example, if you have $10,000 in total available credit across five cards and use $1,000, this is better than if you have $1,000 of total available credit on one card and use $500. That’s because in order to maintain a strong credit score, you are going to want to use below 30 percent of your total credit available at any given time. In the first case, you are using just 10 percent of your credit. In the second, you are using 50 percent. That higher ratio indicates that you are potentially living beyond your means even if you are charging less. That 50 percent would reflect poorly on your credit score.
Credit utilization is one of the most important factors when it comes to your FICO Score, the number that depicts your overall credit worthiness. In general, the higher your credit score, the more attractive you are as a borrower to get loans, mortgages, car leases, and more.
If your credit ratio is higher – like it is in the $500 used of $1,000 available example – applying for additional credit cards could be a good idea. That’s because it will lower your utilization rate. Of course, it will be up to you to still live within your means and not overcharge. You should also be sure not to open a lot of credit cards at the same time, because that will potentially raise a red flag to lenders that you are looking to take out more credit than you can realistically pay back.
Are you missing out on credit card points and rewards?
One major reason why people consider opening new cards is because some cards are made specifically for certain kinds of purchases. There are credit cards that reward you for trips to the gas station, purchases at the grocery store, and purchases on online marketplaces like Amazon. There are other credit cards that encourage travel and hotel stays – both domestic and international.
If you think that you could take out a credit card that would reward the lifestyle you are already living, it could certainly be wise to take out another card.
These are the basic questions to ask regarding your own credit card decisions. They can be a great help in your day-to-day life, and can also be helpful in terms of building a strong history of credit.