How Many Credit Cards Should You Have?

Credit cards can be an important convenience. You don't need to carry a lot of cash, you can make purchases on the Web, you have a monthly statement to keep track of your expenses, and you can get yourself out of a jam in an emergency. Certain credit cards offer benefits such as airline miles or rewards points that you can exchange for cash rebates or other premiums. And credit cards can build credit, if you use them responsibly. How you manage your credit cards is the key to deciding how many you should have. If not managed properly, even one card can be too many. You need to think about what you use credit cards for, with a clear awareness of your own spending habits. If you are able to control your urge to spend, and pay off the balances each month, you may be able to handle multiple credit cards. But if credit cards tempt you to spend more and accumulate debt, you should limit the number of credit cards you have to a minimum.

If your credit limit is $4,000, you shouldn't carry a balance of more than $2,000.

You could be fine with just one major credit card such as Visa, MasterCard, Discover or American Express. These credit cards are accepted practically anywhere.

If there is a particular store where you shop frequently, you could take advantage of discount coupons, rewards points and information on upcoming sales by having that store's credit card. And when you are just starting to build a credit history, a gas company credit card is relatively easy to obtain. Also give some serious thought to using debit cards that take money directly from your bank account at time of purchase.

You should clearly understand the interest rate that applies to your credit cards. Some credit cards offer a low or no introductory rate, but generally for a certain time. Then the rate increases. If you pay off the balance each month, you avoid finance charges. But if you pay less than the total, or just the minimum payment, you could accumulate a substantial amount in finance charges. You should focus on the APR: the annual percentage rate. And there may be a different rate for cash advances you take out on your credit cards.

As Karin Price Mueller points out, you should be aware of how credit cards affect your FICO score, which is your personal credit rating that affects your ability to get credit and the interest rates you are charged. Your payment history accounts for 35 percent of your score. The amounts you owe make up another 30 percent. Other factors include the length of your credit history (15 percent), the types of credit you use (10 percent), and new credit activity (10 percent).

When you open a new account, your credit score could go down slightly for a short time. This is because of the risk of having more credit and running up more debt. Once you demonstrate a history of regular payments, your score will go back up. The balance you owe, compared with the total credit you have available (the limit on your credit cards), is what represents 30 percent of your credit score.

Cate Williams, vice president of financial literacy at Money Management International, recommends keeping your debt ratio under 50 percent. If your credit limit is $4,000, you shouldn't carry a balance of more than $2,000. Ideally, you should keep the balance at 30 percent or less, or better yet, pay off the balance each month.

Kevin Hagen

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