How many credit cards should you have? One, two, nine, one for every day of the month? Ok, maybe not 30, but we can assure you there is a point in life for those questions, and it usually occurs when you’re on the verge of being drowning by debts or wanting to increase your score fast.
Credit cards are financial tools based on revolving credit. Meaning that once you get one of them approve, you could use it as long as you want without reapplying every time you make a purchase.
Credit cards permit you to pay them back in full or partially at the beginning of every new cycle, a period previously set by lenders. Once you have one of these instruments in your pocket, your credit score will be affected by how do you use it.
For example, FICO takes these five categories into account when calculating someone’s score.
- Payment history (35%)
- Level of debt/credit utilization (30%)
- The age of credit (15%)
- Mix of credit (10%)
- Credit inquiries (10%)
Understanding this is key to start making more rational use of credit cards. Payment on time is a significant factor, but then credit utilization comes next. This ratio refers to the amount of available credit limit on use by the end of a cycle. For instance, if you have a $3,000 credit limit and you owe $2,500, your credit utilization is a high 83,33%. According to algorithms, the closer you are to reaching your limit, the risk of becoming defaulter increases.
What about having multiple cards?
You could have multiple cards instead of one (or no one but that strategy does not contribute to getting a higher credit score) and distributes your debt among all of them. At first look, it seems like a clever move, but, again, it depends on how you manage this play.
The debt level considers your credit utilization card by card and then calculates your overall situation. The most common advice is to have this percentage under 30%, but higher than 0%. It is better to owe one percent of your limit than zero for credit score purposes. The last scenario could mislead your account into being label as inactive.
Calculating your ratio
It is not a complicated formula. We gave you the hints above. First, check your credit card limit. If you owe more than one, sum. CCL 1 + CCL2 + CCL3 + an so on. The result is your capacity of indebtedness. Now, check your current balances and sum them too. That is how much you owe. Divide total debt into total Credit Card Limit and multiply the result by 100 to get a percentage.
By this point, you should have a better general idea about managing your credit card consumption to make a favorable impact on your credit score. The lower the rate, the higher your score could be. However, increasing your overall limit by combining different credit cards could lead you to an overwhelming position where you must deal with different billing cycles, interest rates, and annual fees, which could compromise your budget.
Also, when it comes to credit cards, other factors are influencing your score. For instance, the average age of accounts, because the longer you have credit cards open, the better it is for your score. Or closing credit cards because your overall limit will drop down, and your credit utilization rate will go up.
Last, we would like to recommend going with the flow to respond to how many cards you should owe. Americans have an average of 4 cards, so having two or three looks like safe advice.