Summary: We discuss a number of critical factors that need to be considered when deciding on the proper number of credit cards you should have.
A 2019 study from the credit reporting company Experian revealed that the average American has four credit cards. But many people don’t stop there.
With tempting offers attached to opening new credit card accounts (travel miles, discount shopping, cashback rewards and more) it’s easy to get carried away and apply for more.
While it’s nice to have the perks that come with multiple accounts, you have to wonder: How do all of those cards affect your credit score?
Credit Utilization Ratio: How to Find Yours
To find your utilization ratio, add up the total amount of credit that is available to you through your cards.
Then, figure out how much debt you have outstanding on those cards.
The percentage of your debt relative to your credit limit is your utilization score. The lower the score, the better your credit.
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It makes more sense with an example.
Let’s say I have four cards, each with a $25,000 limit. Adding up those credit limits gives me my total available credit: $100,000.
Next, I add up my balances on each card:
Card | Debt | Credit |
|---|---|---|
Card 1 | $3,500 | $25,000 |
Card 2 | $1,000 | $25,000 |
Card 3 | $12,000 | $25,000 |
Card 4 | $7,000 | $25,000 |
Total: | $25,500 | $100,000 |
Now, I divide my total debt by my total available credit:
23,500 / 100,000 = .235, or 23.5%
With a credit utilization ratio of 23.5%, I’m in pretty good shape.
Most credit bureaus require your ratio to be under 30% to be considered a good credit risk.
How to Improve Your Credit Utilization Ratio
Most people assume that cancelling credit cards improves their credit score. After all, reducing your availability to credit shows that you are a wise and thoughtful borrower!
But lowering your credit access can actually make you look like more of a credit risk.
Sounds strange, right?
But you’ll see why when you do the math.
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If we go back to my original example, let’s say that I pay off credit card 2 for $1,000 and then cancel the card.
Here’s my new ratio:
Card | Debt | Credit |
|---|---|---|
Card 1 | $3,500 | $25,000 |
Card 3 | $12,000 | $25,000 |
Card 4 | $7,000 | $25,000 |
Total: | $22,500 | $75,000 |
22,500 / 75,000 = .3 or 30%
By paying off a card and reducing my available credit, I’ve actually increased my utilization score.
And since this number can account for up to 30% of my overall credit score, it may have even cost me some valuable credit points.
Based on those calculations, you might come to the conclusion that the more credit cards you have, the better. But that would be taking things too far in the other direction.
While more credit may bring your utilization score down a little, getting credit for credit’s sake is not a good idea.
Why You Shouldn't Get Too Many Credit Cards
You are at risk for overspending. The temptation of pulling out a new, untapped source of credit for impulse purchases can be too great for many people. Do some soul searching and determine if you really need access to large amounts of credit.
You are more likely to miss a payment. Juggling 10 different cards means 10 different payment cycles. Keeping up with them would be a full-time job, and the likelihood of missing a payment increases with every new card you get.
It’s freaking expensive. The current average interest rate on a credit card is 17.35% and the current average interest paid per year (per household) is $2,500. Can you easily think of 10 awesome things you could do with an extra $2,500 a year? Me too.
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They’re practically immortal. Cancelling a credit card doesn't make it go away. It lingers on your credit report--menacing and ghostlike--long after you’ve cancelled it. It can stay there for up to 10 years, in fact!
Anything on the report influences your credit score. Cancelled cards that had a positive history will boost your numbers (good for you!). But cancelled cards with a negative history will continue to chip away at your credit status.
Credit then, like fine wine, good chocolate, and Netflix binging, is something that needs to be managed with moderation.
On the one hand, you want a few cards that you can use and pay off regularly to show that you can be trusted with credit. But if you abuse that privilege, you’ve essentially put a red flag on your account.
How to Find Balance
Figuring out where your “sweet spot” of moderation is doesn’t have to be difficult or time consuming. Just take stock of the cards you’re using now and figure out which ones provide you with the most value.
Provided that it is in good standing, plan on keeping your oldest credit card. It shows that you have a long history of managing debt responsibly.
You may also want to keep cards that don’t have an annual fee because that will save you money in the long run.
If revolving credit shows up as one of your risk factors, then go ahead and cancel every card that didn’t make your A List. That will clean up your credit report while still giving you access to your most important cards.
Quick Tip:
When dealing with a Secured Credit Card you get to choose your own credit limit, you should start with a good amount.
If there is no mention of your open accounts, then they probably aren’t affecting your credit score. You don’t necessarily need to cancel them, but you can still make some smart adjustments.
Pay off any cards that are on your B List, and then retire them to the bottom of your sock drawer (or somewhere else where they can’t tempt you).
They’ll still be available if you need backup credit, but you won’t be tempted to use them for impulse purchases.
No Magic Number
There’s no “right” number of credit cards to have.
Credit bureaus look at your entire credit situation, not just your number of cards, to determine what kind of borrower you are.
Keeping in mind that several credit cards can improve your credit utilization score but too many cards can increase the likelihood of overspending, it’s up to you to find a balance.
Think of yourself as a financial Goldilocks, figuring out where the “just right” spot is between too few and too many.
Kathy G. Mills is the author of the website Wall Street is Waiting. The site provides informative and entertaining posts on investing for beginners. She is also the author of the award-winning book “Market Mojo: A Beginner’s Guide to the Stock Market,” published in 2017. (A follow up, “Market Mojo: Beyond the Stock Market” is in the works!)
Although Kathy focuses on investing, the “Running the Numbers” section of her website offers step-by-step explanations of common financial formulas. If you want to keep reading about credit, you might be interested in her articles Should I Make Only the Minimum Payment on My Credit Card?, or How Do Credit Cards Calculate My Average Daily Balance?
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By Kathy G. Mills - Founder - Wall Street is Waiting