I am asked this question quite frequently and unfortunately I don’t have a universal black and white answer. If you are sifting through your wallet and shuffling a deck of cards this may be a sign you have too many. If you are thinking about opening additional accounts, think again; you may be putting your credit rating and your financial health at risk.
The magic number of cards for you depends a lot upon your ability to use your credit wisely. But here are a few other factors to consider…
Your debt-to-income ratio is an important piece of your credit profile; lenders use it to consider you for new lines of credit. Your debt-to-income ratio is calculated based on the assumption that all of your accounts are “maxed out”. Depending on where you stand, you may or may not be extended additional credit.
To calculate your debt to income ratio on your own, figure out the total amount if you maxed out all of your credit cards. If the magic number is over 37% of your gross income you may want to consider downsizing your wallet. Close unused accounts first, starting with the newest ones.
Credit utilization is calculated by taking your total outstanding debt and dividing it by your total credit available.
For example: If you have five cards, one with a balance of $$5,000, another at $2,500, and the others each with $200. Your total outstanding debt is $8,100. Your total available credit is $10,000. So your credit utilization score is 81%, which is not good.
Ideally, your credit utilization should be less than 30%.
So in this example, my recommendation would be to pay the debt down as quickly as possible. Paying only the minimum balance and continuing to use the cards is not going to help your cause. If you are only paying the minimums or can no longer afford to keep up with the minimums you may consider enrolling in a debt consolidation or debt management plan. These types of plans enable you to consolidate all of the accounts into one payment made monthly; it is often lower than your current monthly minimum payments as the debt relief provider works with your creditors to negotiate lower interest rates and waive fees. As an added bonus you can no longer use the accounts; helping you to stay on track with your goal of getting out of debt.
Instinctively we feel compelled to use cards floating around in our wallet, so if you have many cards with relatively high balances it’s time to take a stand for your financial health and pay them off.
The Juggling Act
The more credit cards you have the more difficult it is to juggle them. Take a look at your credit card bills. Are they all due the same day? Probably not. This makes managing your monthly payments exponentially more difficult the more accounts you have open with a balance. Remember you most likely don’t have the same credit limit on all of them either, so you may go over without even realizing it. That means more fees and more headaches.
So your magic number depending on your juggling abilities may be one, two, or three cards, any more than that really isn’t necessary. If you can manage more, good for you, ultimately you know what you can handle.
Be sure to add credit card bills to your monthly budget and maybe even add them to online bill pay for tracking and ease of making payments. A missed or late payment will cost you; an increased interest rate!
If you have recently divorced and are lacking in the credit department it is important to begin to build your credit. Start with one card that you can manage well. Pay your balance in full each month, make the payment on time, and learn the ropes of using credit. Using credit wisely is an important part of your financial health and should be taken seriously.
How many credit cards are in your wallet right now? What mistakes have you made with credit?
The Divorce Coach Says
I have three credit cards. I have one that I earmark for expenses related to the children. My ex and I have what I think is an unusual child support arrangement. When we divorced, we took a portion of our assets and set up a trust for the children. Their expenses (subject to the terms of the trust) are paid for by these funds and so I need to keep them separate.
I then have two cards – an American Express and a Visa. I know not everywhere takes American Express so I like to have the other card as a backup. All my cards are no annual fee and each has a rewards program.
In addition, I do have quite a selection of store credit cards – Best Buy, Sears, Kohls and Victoria Secrets and I even discovered a few others I’d forgotten about. Some of these I’ll keep because I like the special offers made to cardholders. There are others though that I could definitely close. I opened them for large purchases, such as a new furnace, to take advantage of free financing offers and now the account is paid off they’re dormant. It hadn’t even occurred to me that they could be impacting my credit score. Wow. Thanks for pointing that out Suzanne!
Suzanne is a certified credit counselor.
Photo credit: AndresReuda