According to a Credit Karma report, the average American has 2.5 credit cards. Some have two; for others it’s three. Of course, emissions can be more or less. The numbers are everywhere, which raises the question – how many credit cards do I need to have?
There is no perfect answer, like many other things in life, because personal finance is personal. However, you can be guided by some important criteria. So, keep reading to learn about the pros and cons of how many credit cards fit your budget and lifestyle.
Credit card benefits
Credit cards have some benefits that benefit the holders. When used responsibly, credit cards make life easier and maximize your money. Here is a list of some of the perks of a credit card:
1) To create credit. Nobody argues that money is needed. Credit expands your purchasing power for mortgages, business investments, and car loan financing. In addition, you can use credit cards for responsible lending. You show your creditworthiness with an impeccable payment history and low utilization rates. As a result, your FICO score improves, leading to better funding options in the future.
2) To receive a reward. Nobody wants to spend more than they need to. So credit card companies can offer cashback or points on your everyday purchases to save you money without much effort. In addition, many cards come with signup bonuses that encourage upfront spending to earn bigger rewards. Pay off the balance without interest and you win.
3) Convenience. Credit cards are easy to use and more convenient than cash. They take up less space in your wallet and allow you to keep more money in a high-interest savings account for longer. However, this plus can quickly turn into a minus if not used wisely.
Cons of a credit card
Despite the many benefits, credit cards also have a number of disadvantages. Here is a list of some credit card cons:
1) The possibility of overspending is real. It’s easy to spend more than you intend using a credit card instead of cash, and there’s scientific evidence.
Professors Drazen Prelek and Duncan Simester found that participants spent more when shopping with a credit card. They reasoned that credit card purchases did not use real money. Instead, consumers borrow money with little agreement to pay it back over time. As a result, they are more likely to forget the pain of spending their hard-earned money until the bill arrives, leading to a cycle of debt buying to keep up with their lifestyle.
Fast food restaurants such as McDonald’s, Burger King and Wendy’s did not always accept credit cards. However, once they did, they noticed their value — cashless purchases at fast food restaurants were 35% higher than cash purchases.
Spending tomorrow’s earnings is psychologically less painful than money in a bank account today. However, those who pay for their purchases today enjoy the product more than those who finance them with credit cards.
2) It’s expensive if you don’t pay the balance every month. Credit cards have high interest rates which can take years to pay off just the minimum balance. It can quickly get out of control. Some credit cards also include additional fees, such as transfer fees and annual fees, which are added to additional credit card costs. It’s easy to find yourself in long-term credit card debt.
3) It could hurt your credit if you miss a payment. Just as credit cards can help your credit history, they can damage it. Missing one payment can result in late fees that will remain on your credit report for up to 10 years. In addition, these innocent missed payments may affect future loan applications and terms of use.
How many credit cards should I have?
There is no magic formula for calculating the required number of credit cards. There are many pros and cons. However, in the end it all comes down to your financial situation and spending habits. You must consider your income, ability to pay bills on time, budget, and money habits.
Having multiple credit cards comes with a lot of responsibility. After all, it’s not free money. Your ability to budget and live within your means is a strong indicator of your ability to manage credit wisely. Credit cards can end up costing you more in the long run and significantly affect your long term financial goals if not used properly.
Some people only need one credit card. This allows them to build credit, earn rewards, and keep track of their spending by paying the balance for each month. For others, it might be three credit cards.
Of course, some people prefer not to have a credit card. They don’t like the risk of missing a payment or the out-of-control spending that credit cards can involve, or they may have had bad experiences in the past.
Is there such a thing as too few credit cards?
There is no penalty for not having or using a credit card. However, credit cards can help build credit. It is difficult for banks to give you a loan if you have not shown that you can return the money.
Having only one or two credit cards can result in a high usage rate. If you don’t pay off your credit card balance on time, you risk looking like you’ve reached your credit limit. For example, if you have two cards with a combined maximum credit limit of $10,000 and a balance of $5,000, the utilization rate would be 50%. On the other hand, if you have four credit cards with a total maximum credit limit of $20,000 and a balance of $5,000, you will have a 25% utilization rate.
While none of these utilization rates are optimal, a 25% utilization rate seems to be better than 50%. It can be harder for lenders to judge your creditworthiness if you don’t have a lot of credit experience. At the same time, having too many cards can be problematic.
How many credit cards are too many?
We don’t have the perfect number of credit cards. So we don’t know how much is too much. But we know that too much is not a good idea.
Opening too many credit cards close together can negatively impact your credit score. However, there are still a few problems.
There are plenty of them to keep track of in your budget and bill payments. Plus, you increase your chances of spending more than you planned by using credit cards.
When building your credit card wallet, ask yourself the following questions to help determine if there are too many:
- Can I properly track credit card expenses?
- Will I be able to pay the balance of each card in full before it expires?
- Will I lose money by paying too many fees?
Good Practice for Credit Cards
There is nothing good or bad about having a credit card. It’s personal. Just keep in mind, cards work for some people and don’t work for others. So, if you use a credit card, be sure to do it wisely. A loan can improve your financial situation or destroy it.
Here is a list of good credit card habits:
1) Use a budget. Use your budget to track credit card spending by category. Don’t spend more than you plan to return at the end of the month.
2) Pay the monthly balance before the due date. There is no rule that you must pay the balance by the due date. Instead, pay money back to your credit card as you spend it. So you see money leaving your main checking account just like you would with a debit card or cash. If you don’t like the idea of logging in every day, set a goal to pay your credit card balance weekly.
3) Check your credit score regularly. Look out for credit usage and credit scores from credit reporting agencies such as Experian, Transunion, or Equifax. One day you may need more credit. So, you want to make sure you’re good at this.
4) Maintain a low utilization rate. Do not exceed your credit card balance. Instead, pay them back as you accumulate to maintain your credit score.
5) Minimize the frequency of opening new accounts. Have a plan for your loan. Don’t open accounts just to open them and keep track of the ones you have. You must pay attention to the loan in your name. Opening accounts frequently can damage your credit score, which will worsen your financial situation later on.
6) Look for cards with no annual fees and low interest rates. Building your credit with a credit card is acceptable. However, you don’t want to pay more than you need. So stick to cards with no annual fees and low interest rates.
7) Avoid giving out cash. Even in case of early repayment, an additional fee is charged for cash withdrawal. So just avoid them for simplicity. Instead, spend only the money you have.
bottom line
Credit cards help in various situations. For example, they are convenient and can earn you rewards. However, in some cases the opposite may also be the case. It’s one more thing to think about every month and one more bill to pay. So, do you need it?
This is a personal decision based on your financial situation and financial habits. No credit card is allowed. In other cases, it’s best to keep three cards. It comes down to your ability to repay them interest-free and control your spending.
Regardless of the number of credit cards you have, remember to follow good credit card practices to build good credit, maximize rewards, and minimize credit card costs.
This post originally appeared on Savoteur.