According to a Credit Karma report, the average American has 2.5 credit cards. Some have two; for others, it’s three. Of course, outliers may have more or less. The number is all over the place, which raises the question–how many credit cards should I have?
There’s no perfect answer like so many other things in life because personal finance is personal. However, you can use some essential criteria as a guide. So, keep reading to learn about the pros and cons of how many credit cards fit your budget and lifestyle.
Credit Card Pros
Credit cards come with some advantages that benefit owners. When used responsibly, credit cards make life easier and maximize your dollars. Here is a list of some credit card pros:
1) To build credit. There’s no arguing that money is essential. Credit extends your purchasing power for a home mortgage, to invest in a business, and to finance an auto loan. In addition, you can use credit cards to build credit responsibly. You show creditworthiness with your flawless payment history and low utilization rate. As a result, your FICO score improves, resulting in better financing options in the future.
2) To earn rewards. Nobody wants to spend more than they have to. So credit card companies may offer cashback or points on your everyday purchases to save you money with little effort. In addition, many cards come with sign-up bonuses that encourage up-front spending for more significant rewards. Pay the balances off 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 longer. However, this pro can quickly turn into a con when not used wisely.
Credit Card Cons
Despite many advantages, credit cards also come with a few disadvantages. Here is a list of some credit card cons:
1) The potential to overspend is real. It’s easy to spend more than you intend when using a credit card versus cash–and there’s science to prove it.
Professors Drazen Prelec and Duncan Simester found that participants spent more when making a credit card purchase. They reasoned that credit card purchases don’t use real money. Instead, consumers borrow money with a small agreement to pay it back over time. As a result, they’re likely to forget the pain of spending their hard-earned money until the bill comes in, leading to a cycle of debt-riddled purchases to keep up with their lifestyle.
Fast-food restaurants such as McDonald’s, Burger King, and Wendy’s didn’t always take credit cards. However, once they did, they noticed their value–cashless purchases at fast-food restaurants were 35% higher than cash purchases.
It’s less psychologically painful to spend tomorrow’s earnings than the money in your bank account today. However, those who pay for their purchases today have more enjoyment with the product than those financing them with credit cards.
2) It’s expensive if you don’t pay off the balance every month. Credit cards have high-interest rates that can take years to pay off when only paying the minimum balance. It can get out of control quickly. Some credit cards also come with extra fees such as transition fees and annual fees to add to additional credit card expenses. It’s easy to find yourself in long-term debt with credit cards.
How Many Credit Cards Should I Have?
A magic formula to calculate the number of credit cards you need doesn’t exist. There are many pros and cons. However, it ultimately 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 are strong indicators of your ability to manage credit wisely. Credit cards can end up costing you more in the long run and significantly impact your long-term financial goals if not used properly.
For some people, having one credit card is enough. It allows them to build credit, earn rewards, and track their spending while paying off each month’s balance. For others, it could 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 out-of-control spending that can be associated with credit cards, or perhaps, they’ve had a bad experience in the past.
Is There A Such Thing As Too Few Credit Cards?
There’s no punishment for not having or using a credit card. However, credit cards can help build credit. It’s hard for banks to give you a loan when you haven’t shown that you can pay the money back.
Only owning one or two credit cards may lead to a high utilization rate. If you don’t pay your credit card balances on time, you run the risk of looking like you’ve maxed your credit line. For example, if you own two cards with a combined maximum credit limit of $10,000 and acquire a $5,000 balance, you’ll have a 50% utilization rate. On the other hand, if you have four credit cards with a combined maximum credit limit of $20,000 and acquire a balance of $5,000, you’ll have a 25% utilization rate.
While neither of these utilization rates is optimal, a 25% utilization rate appears better than 50%. It may be more challenging for creditors to judge your creditworthiness when you don’t have much experience with credit. At the same time, having too many cards can be problematic.
How Many Credit Cards Are Too Many?
We don’t have a perfect number of credit cards to have. So, we don’t know how many are too many. But, we know too many isn’t a good idea.
Opening too many credit cards close together can negatively impact your credit score. However, there are a few more problems.
They’re a lot to keep track of in your budget and bill pay. In addition, you increase your chances of spending more than you intended when using credit cards.
As you’re building your wallet of credit cards, ask yourself the following questions to help you determine if you have too many:
- Can I track my credit card spending properly?
- Will I pay the balance in full for each card before its due date?
- Will I lose money by paying too many fees?
Good Practices for Credit Cards
There’s nothing right or wrong with owning a credit card. It’s personal. Just keep in mind, cards work for some people and don’t for others. So, if you use a credit card, be sure to do it wisely. Credit can enhance your financial situation or destroy it.
Here’s a list of good credit card habits to build:
1) Use a budget. Use your budget to track credit card spending by category. Don’t spend more than you plan to pay back at the end of the month.
2) Pay the monthly balance before the due date. There’s no rule that you have to pay the balance on the due date. Instead, pay the money back to the credit card as you spend it. This way, you see the money leaving your primary checking account just like using a debit card or cash. If you don’t like the idea of logging in every day, set a goal to pay the credit card balance weekly.
3) Check your credit score regularly. Pay attention to your credit utilization and credit score with credit reporting agencies like Experian, Transunion, or Equifax. You may need more credit one day. So, you want to make sure you’re managing it well.
4) Maintain a low utilization rate. Don’t max out your credit card balances. Instead, pay them off as you accrue them to keep your credit score up.
5) Minimize the frequency of opening new accounts. Have a plan for your credit. Don’t open accounts just to open them and keep track of the ones you have. You need to pay attention to the credit in your name. Opening accounts frequently can harm your credit score, hurting your financial situation later.
6) Look for cards with no annual fee and low-interest rates. Building your credit with a credit card is acceptable. However, you don’t want to pay more than you have to. So stick to cards with no annual fee and low-interest rates.
7) Avoid cash advances. Even if paid back early, a cash advance comes with extra fees. So, just avoid them for simplicity. Instead, only spend the cash that you have.
The Bottom Line
Credit cards are helpful for a variety of situations. For example, they’re convenient and may earn you rewards. However, the opposite can be true in some cases. They’re one more thing to think about every month and one more bill to pay. So, do you need one?
It’s a personal decision based on your financial situation and money habits. Not owning a credit card is acceptable. In other cases, holding three cards works best. It comes down to your ability to pay them off without owing interest and keep your spending in check.
Regardless of the number of credit cards you have, don’t forget to follow good credit card practices to build good credit, maximize rewards, and minimize credit card expenses.
Theresa is the founder of the blog In The Game Investing. She is a personal finance and investing enthusiast, helping professional women take control of their money and investments.