Credit Cards: “Too Many” or “Too Few”?
Written by Dongmiao Cui   


From a credit score’s point of view, ultimately it is not the number of credit cards that matter: the number indirectly affects your credit score only when combined with other factors. In addition to the number of credit cards under your name, the ages, balances, credit limits and types of the credit cards are most important items that determine whether or not you are in a propitious situation.

To figure out your “optimal” credit card holdings, let’s first find out what variables in your credit scoring involves the number of credit cards.


Credit Utilization Rate

The number of credit cards may greatly, though indirectly, impact your credit utilization rate. The credit utilization rate is a ratio of your total balances over total credit limits. Both components in this ratio include the quantity of your credit cards. However as the calculation shows, the number alone does not say much: you can hold 10 cards, each with a running balance less than 10% of the credit limit; or you can hold 4 cards, both with used credit more than 70% of the credit limit. You will get a 10% credit utilization rate for the former scenario and 70% for the latter. In this case, 70% is considered too high and lenders may prefer the person with 10 cards even though 4 cards may appear more reasonable than 10. Real life is usually less extreme than the example and hence more complicated. However the rule of thumb is to look at the bigger picture - credit utilization rate, rather than merely focus on the number of cards


Hard Inquiries

The number of new cards also affects your credit score through induced credit inquiries. Every time you apply for a new card, the card issuer will pull a hard credit inquiry on your profile, which lowers your credit score. The more new cards you add, the lower your score will become. So you want to be very cautious when facing the temptation of opening a new credit card account to just get a 10% discount on a single purchase.


Amount Owed

Since Amount Owed is another important factor in credit scoring, having too many credit cards may backfire when you lose track of the balance on each account and therefore risk failing to pay on time. Having too many cards also make your debt less manageable. If your debt accumulates on your numerous accounts and finally gets out of control, your credit score will get hurt badly.


Specific Types of Credit Cards

Despite the mooted effect the total number of cards have on your credit score, the amount of some specific types of credit cards can have a much clearer impact.


The number of old cards is preferred than that of new cards because old cards lengthen your credit history. The number of credit cards issued by mainstream banks is also favored more than that of cards issued by department stores. A revolving credit card with a department store usually has tight credit limit while a major bankcard can increase your credit limit to a stratospheric level if the card is well utilized. 


Think Twice Before Closing These Cards

If you are considering reducing the number of cards you have to simplify your daily financing, you might want to check out the following list of cards that can potentially harm your credit score when closed.
  1. Any card with a running balance: When you close a card, its available credit will become 0 while the running balance remains counted. The card may appear maxed out and your credit utilization rate will go up. Similarly, if you close a card, which is the only card with available balance, your utilization rate will increase as well.
     
  2. Your only credit card: Credit scoring takes into account the variation of your credit. So keeping a mix of credit cards and loans can help improve your score.
     
  3. Your oldest credit card: Many people choose to close their oldest cards because they rarely use them anymore. Doing this will shorten their credit history. In stead, you can take advantage of your old cards by using them occasionally to keep them active in the calculation of your credit store.
Last Updated on Wednesday, 16 February 2011 14:05