Too much credit is as bad as no credit at all. This is what we usually say in the banking industry. If you have too many credit cards in your wallet, it could hurt your credit score or worse, hurt your balance sheet when it comes time to pay them off! However, if you have only one card, it could hurt it as well… Are credit cards good for your credit score? Actually, they are!

A few reasons to avoid having too many credit cards

Most people tend to think that credit cards were created with an evil purpose in mind (even more evil than the one who created unsecured personal loans ); forcing you to spend more than you can afford and causing you to pay extorsionist interest rates to greedy financial companies in return (mwahahaha!).

Paying with a credit card is like buying goods with “virtual” money for some people. Since they don’t actually take the dollars from their pocket, they feel like they didn’t spend any money… until they get their bill!

Besides temptation, I can’t really say why it would be bad to have more than one credit card. I actually believe that you are better off taming the beast once and for all and learn how to use a credit card responsively.

What is the magic number then?

When people ask me how many credit cards they should have, I tend to answer 3 to 4. Why so many? The very first reason is to have a credit card per company: In my wallet, I have a Mastercard, a Visa and an Amex. While I always use my Mastercard (this is the one that gives me the most points and warranty extension), it sometimes happen that a merchant doesn’t accept it. This is why having credit cards from different companies can be an asset.

The second reason to have more than 1 credit card in your wallet is to protect myself from fraud. If my main card is cloned, it will be cancelled right away by the company and I will receive my new Mastercard in about 10 days. If I’m on vacation during that time, it could be quite a pain to wait 10 days without a credit card. This is when I would use my other cards in the meantime.

The third reason to have 3 to 4 credit cards in your wallet is less known by the public: This will help you build a stronger credit score. One of the key points while calculating your FICO score is the balance of your outstanding debts versus your authorized limits. Take a look at this example:

John has only 1 credit card with a maximum limit of $1,000. He has made a few purchases on the card and his balance is $800. Therefore, his debt utilisation ratio is 80%.

Mary has 4 credit cards of $1,000 limit each and only used the first one. With the same balance of $800, her debt utilisation ratio is down to 20%.

Mary will end-up having a stronger credit score than John because according to the FICO score calculation method, she is far from being maxed out. The theory is that she is better able to manage her credit in a more responsible manner. Interesting isn’t it?

So which credit cards do I need?

I think you should select one credit card that gives rewards points or cash back while the other 2 or 3 should be no fee cards without many incentives. You only have to use the first one and forget about the others. They won’t cost you a thing but they can be useful to build a strong credit history and protect you in case of fraud.

Watch your credit cards, you may be losing money.

Credit card (and other) debts can grow like weeds. Try to tame the it before debt gets out of control. Fixing one habit at a time works, trust me. If you use credit cards or have credit card debt, you have to be diligent with handling them.

I’ve learned quite a lot from personal experience. My first credit card ever was from Citibank when I turned 18. I thought it was so cool to have my own card, even it was only a $300 credit limit one. It had a “low APR” of 14.99%, which jumped to 25.99% in 6 months. Within a week I spent half of my limit. Looking at some old receipts, it seemed like I spent it on a mixture of eating out, gifts for family (I felt good at the time about that), and car repair.

I know while handling credit credit card is a simple process, it’s not easy to actually do and get started with. The key for me was being informed and automating my system.

Review your monthly statements.

Identity theft is becoming more common and a good habit is to look at your statements every month. Sometimes credit card companies make mistakes on charges. I log in to my credit card account every couple of days to see if anything suspicious happens. I need to work on checking my paper statements.

When you review your statements, see if there are any updates or changes to the interest rate or fees. The complete disclosure about credit card fees is long and verbose. Double check to make sure your interest rate hadn’t increased dramatically. A friend told me that her American Express credit card had an increase even though she has never been late with a payment.

If there is an annual fee for your card, I’d get another card or negotiate that off. Why should you be charged a fee to be a cardholder? Basic credit cards that don’t have rewards or low interest rates shouldn’t have an annual fee on the card.

Pay your credit card bills on time.

A good credit history can help you when looking for a mortgage for a home as a higher credit score leads to lower interest rates.  Credit cards are notorious for charging their customers $39 for later charges and $39 for going over the limit. That can be $78/month added to the balance not including the interest. Do yourself the favor and pay on time and keep it under the limit.

Another way credit card companies make their money is by charging you $15 to make a payment over the phone. I can’t think of another provider that charges you for paying them over the phone. Try to mail/send your payments a week early, but if you have to pay $15 to avoid $39 or higher, then suck it up and pay the fee. Automating my bill payments online has made my life much easier and has kept me from having late fees added to my bills.

Pay as much as you can. (Pay in full is best)

Credit card companies might call you a “deadbeat“, but at least you’re not tied to them each month. If you can’t, then pay as much as you can. Do not just settle for minimum payments. If you’re unable to pay the minimum for your credit cards, call them to set up an affordable plan.

With the recession, some companies are willing to work with you. At the very least, ask them to waive fees and lower your interest rate. Again, some credit card companies are more willingly to work with you as the economy has hit many families hard. They would rather get some money than no money. Get your payment plan in writing to protect yourself.

Build your income or reduce you expenses to increase your debt reduction payments and eliminate your debt.

Try a debt snowball or even snowflaking some more into your monthly credit card payments. Pay more than the minimum on the highest interest rates first and continue down your credit cards in descending order. When you pay off the first card, put all the debt payments from it into the second card and continue until you have paid off all your debts.

NEVER lend your credit card to anyone!

This account is tied to YOU and you will be held responsible.

Your Take

How are you handling your credit cards? If you have credit card debt, how aggressively are you attacking it?

Photo Credit: quaziefoto

These are mistakes that we should definitely avoid and yet many people still do them. I have done mistakes #1-3.

1. Carry a balance: You can save money by transferring your balance over to a lower to no interest credit card while you try pay down your balance.
2. Making late payments: If you’ve been tucking away the bills as they come in, you may be in for a huge surprise. Many credit cards charge $39 for late fees and another$39 for being over the limit.
3. Making the minimum payment : Pay more than the minimum on the highest interest rates first and continue down your credit cards in descending order. When you pay off the first card, put all the debt payments from it into the second card and continue until you have paid off all your debts.
4. Charging things without cash in hand: People tend to spend more with credit cards than cash. Having cash on hand forces you to stick to a budget.
5. Not using your rewards card: Some people have yet to earn or redeem their rewards from their credit cards. It can be a wasted opportunity.

Too many credit cards?

How to Use Credit Cards

• Remember real money (yours) is involved. You have to pay this back and it will be with interest. Cash advances typically have a higher interest rate than standard purchases. I learned this the hard way. I feel so stupid knowing I spent YEARS paying off a card filled with stupid charges.
• Review your monthly statements. Identity theft is becoming more common and a good habit is to look at your statements every month. Sometimes credit card companies make mistakes on charges. I login to my credit card account every couple of days to see if anything suspicious happens. I need to work on checking my paper statements.
• Pay your bills on time. A good credit history can help when looking for a home as a higher credit score leads to lower interest rates. I had a bad habit of losing paperwork, so I automated all my bills. It saves on late fees and stamps. Many banks have online bill pay as a feature.
• If you can, pay the full amount owed. Credit card companies might call you a “deadbeat“, but at least you’re not tied to them each month. If you can’t, then pay as much as you can. Try a debt snow ball or evensnowflaking. Find money in your budget to eliminate your debt.
• NEVER, EVER lend your credit card to anyone! Even if it is a trusted family member or family. This account is tied to YOU and you will be held responsible.

Photo Credit: Andres Rueda