How Many Credit Cards is Too Many?

Blog posted On October 14, 2020

When it comes to credit cards, more isn’t always merrier. Most financial advisors recommend limiting your number of credit cards to one or two in order to avoid taking on too much debt. When used responsibly, having multiple credit cards is a good way to maximize your rewards, increase your credit limit, and allow for financial flexibility.

Most Americans have around four credit cards – but is that enough? Is it too many?

There’s no one-size-fits-all answer for every financial situation, but it’s important to consider the following before adding another line of credit to your list of monthly payments.

1. How many credit cards do you have now?

If you don’t already have a credit card, now might be the time to get one. Credit cards are useful when establishing credit history, financing large purchases, and earning rewards. When applying, make sure that you have steady income to decrease your chances of getting denied, which can hurt your credit score.

If you have just one credit card established, you may consider opening another. As long as you can pay both credit card bills on time and maintain a balance below 30% of your credit limit, a second credit card can even offer several different benefits. 

2. How well do you balance your current credit cards?

Remember: one size does NOT fit all. If you struggle to make full, on-time payments with just one credit card, opening a second may not be the right choice for you. While it could help lower your credit utilization rate, it could also tempt you to spend even more. If you already spend more than you should with one credit card, a second might hurt your situation more than help. 

3. How much do you spend per month?

Your total amounts owed accounts for 30% of your credit score – the more you owe, the lower the credit score. To calculate your credit utilization rate, you add up all of your credit card balances and divide them by your total credit card limit. For example, if you charge $1,800 to a card with a $2,000 limit per month, then your credit utilization rate would be $1,800 ÷ $2,000 = 0.9, or 90%. Financial experts recommend keeping your credit utilization rate below 30% for a better credit score. One way to keep your credit utilization rate low is by spreading your payments out across multiple credit cards. If you spend the same amount of money ($1,800) but charge it to two different credit cards with limits of $2,000 each, your credit utilization rate will decrease to 45%, since your total credit limit has increased to $4,000 dollars.

Multiple credit cards are especially useful when you have large, unexpected expenses like medical bills. This allows you to pay the expenses without exceeding your credit card limit or drastically running up your credit utilization rate.

4. What type of card do you have? What type of credit card will you get?

Your bank might offer universal points or cash back, but different credit cards can come with other rewards and bonuses. If you make a lot of purchases at a specific retailer, their cash-back card may be a good idea.  If you spend a lot on travel expenses like hotels and airfare, there are cards that generate rewards specifically for that.  Before you decide on a card check out multiple options and compare the rewards. 

5. How much money do you make?

While your income is not directly related to your credit limit, it can help guide your decision on whether or not to add a new line of credit. It is good practice to spend less than 36% of your monthly income on debt, based on the common debt-to-income standards used by mortgage lenders. If you pay $200 a month for student loans, $100 a month for your car loan, and $500 a month on credit card bills, your total monthly debt would be $800. Let’s say your monthly income is $4,000. Then, your debt-to-income ratio would be $800 ÷ $4,000 = 0.2, or 20%. With consistent 20% debt-to-income ratios, on-time payments, and full payments, you can probably add another line of credit without much issue.

There’s no such thing as the perfect number of credit cards. Every financial situation is different, and ultimately, the number of credit cards you have should be tailored toward your financial circumstances and goals. If you have any questions about debt-to-income ratio, consider talking to a loan officer near you.

Sources: CNBC, CNBC, Investopedia, Money.com