My friend Andrew has the fattest wallet I’ve ever seen in my life. I don’t know how it’s possible to cram as much into a leather billfold as he manages to wedge in there. It’s dripping with receipts, cash, multiple credit cards, and who knows what else. . My guess is he’s got 12 credit cards stuffed in that thing!
And while that might be excessive, there are a lot of folks that aren’t using credit cards as effectively as they could be. Perhaps they are still using a debit card to pay for things. Maybe they are worried about their credit report being damaged if they open multiple credit cards. You don’t have to pile your wallet as full as Andrew’s, but you’ll likely want to consider signing up for another credit card or two.
According to credit bureau Experian, the average American has 4 credit cards in their possession. But is that ideal or is it overkill? Most people have no clue how many credit cards they should be carrying.
And it’s ok if you’re clueless. Everybody starts somewhere. But it’s time to build a plan for using credit cards to your advantage, and not cause real financial problems down the road.
So let’s talk about whether or not you should get another credit card and how that additional piece of plastic can help your personal finances in the long run.
When to AVOID credit cards
First, we should address why credit cards sometimes get a bad rap. Some personal finance folks prefer to create a line in the sand and preach the removal of credit cards from your wallet or purse altogether. “Purge them – you don’t need credit cards in your life at all,” they’ll say.
And in some cases, that advice is spot on. If carrying credit cards is too much of a temptation for you to handle, it’s best to stick with cash. Or use VISA debit cards that don’t allow you to overspend! The benefits that credit cards can provide are numerous, but they don’t outweigh the downsides of debt accumulation if handled poorly. If you’re in credit card debt, it’s crucial to pay it off quickly.
If you are living on fumes and are unable to pay the full statement balance when it arrives, you would be better off having zero credit cards in your possession.
In fact, some millennials are signing up for credit cards in order to score the sign-up bonus and rewards yet consistently maintain a balance on that card. That’s self-defeating! Earning 2% cashback on a credit card is great. But it’s the opposite of great if you carry a balance and are paying heaps of interest.
The wise use of a credit card on the other hand can provide meaningful benefits for you and it’s important to know what those are.
How Your Credit Score Works
There are 5 main factors that affect your credit score. They each carry a different “weight”, shown in this pic below.
Payment History: It’s EXTREMELY important to pay your credit card bills each and every month before the due date. It doesn’t matter how many credit cards you have, this is the utmost important factor.
Credit Utilization: Based on ALL of your available lines of credit (cards, auto loans, mortgage, etc) “good credit” is when you have a low percentage utilization.
Age of Credit Lines: Credit history is important, the longer you have credit lines open, the better your credit score will be factored in this category.
Credit Type & Mix: Those with higher scores have multiple credit card types (Amex, Visa, Discover) as well as all different types of loans. **This doesn’t mean you should go into debt with every area in your life!**
New Queries: A good credit score is built slowly, over time. If you apply for too many credit cards, too quickly, you’ll end up damaging your score a little.
Now, let’s run through how these apply when you are considering to open another credit card…
Having more credit lines will improve your credit report (over time)
A robust credit score is a financial life-saver. And having different types of credit available to you will actually improve your score, not hurt it. That’s counter-intuitive to many folks, but having multiple credit cards will also boost your score over the years as long as you use them wisely.
By adding a couple more credit cards into your life, your score will go up in large part because your credit utilization is going down. And credit utilization is one of the main factors that influence your credit score. Since your utilization rate makes up 30% of your overall score, it’s crucial to keep an eye on that number.
That higher score will allow you to take advantage of the best available interest rates on a car or home purchase. A solid credit score can also help you get a lower interest rate on home or auto insurance as well.
Avoiding credit cards altogether is likely to prevent you from achieving a top-notch credit score. And that could cause you other problems and cost you thousands of dollars in additional interest over the course of your life.
Pro Tip: If you don’t end up getting a new credit card, just calling your existing credit card company and increasing the credit limit will also help your overall utilization!
When you shouldn’t be applying for another credit card
Speaking of credit scores, you don’t want to open that new credit card at an inopportune time. When you apply for a new card is really important. That’s because getting another credit card will have a negative effect on your credit report.
But wait, didn’t I just say the opposite above? That this new credit card is going to help your credit score out? Yes, I did! And it sure will…over time.
But there’s an initial drop in score when you first open that new card. So you need to make sure that you aren’t shooting yourself in the foot by applying for a new credit card at an inopportune time.
That drop in score is often minimal and won’t last too terribly long. But if you are about to buy a home, refinance a current mortgage, or take out a car loan you’ll want to avoid also filling out a credit card application at the same time. Wait until you’ve finalized the more important purchase. Otherwise, even just a slight hit to your score can throw a wrench in that process costing you a choice borrowing rate or potentially even messing up your purchase altogether.
You should probably have two credit cards, minimum
The floor of how many credit cards you should have is two. Having fewer than two cards is just begging for trouble. Three is better from a rewards and credit-building perspective, but having at least two is of huge importance.
Many Americans found this out the hard way in recent months. Some folks, of course, found that a credit card wasn’t just a helpful payment tool, but it necessary to have one during the topsy turvy year that was 2020. And many credit card issuers were cutting credit card limits or even canceling cards altogether in the midst of difficult times.
In fact, 70 million people found themselves in a situation where the credit card they needed access to was no longer at their disposal. So plan ahead – having a second credit card is important for multiple reasons. And the reaction of the credit card companies in the middle of the pandemic shines a blazing light on at least one reason why.
Multiple credit cards give you rewards diversification
The more cards you carry the more you’ll be able to take advantage of the rewards that are offered. Many credit cards also offer a sweet sign-up bonus, allowing you free flights, hotel stays, and even cash back!
You’ll want to be intentional about the credit cards that you bring into your life. Make sure that you prioritize cards that reward you for how you spend. For instance, I’m a believer that most people should get a card like the Citi Double Cash card that offers 2% cash back on every purchase. That’s the best baseline card for almost everyone.
After that, comb through your recent spending history to see which categories most of your purchases fall into. Do you travel frequently – in normal times at least? And if you do, is there a specific airline that you tend to fly regularly, or are you booking based on the ticket price alone?
How you answer those questions will determine which cards work best for you.
For example, the best card for people that spend quite a bit on groceries every month is the American Express Blue Cash Preferred® card because you score 6% cash back rate on all purchases at US supermarkets! But if you are a travel nerd, the Chase Sapphire Preferred Card is one of the best cards on the market. Terms apply.
And if you are in your car quite a bit and are also a warehouse club member, look at the Costco and Sam’s Club credit cards. They pay 4% and 5% respectively on purchases at the pump.
The more cards you have in your possession and use effectively, the better off you’ll be when it comes to maximizing rewards.
What Is The Best Credit Card?
This is a trick question, because as we mentioned above, the best credit card is the one that matches your spending style.
If you drive a TON, having a credit card with excellent gas rewards is important. If you travel a lot, travel rewards cards will give you the most value.
We’ve actually created an interactive tool you can use to find the best credit card suited for you. Check it out here: Which Credit Card is Best For Me?
After inputting your reward preferences, the tool will search all available promotions and offers and show the best credit card suited for you.
The diminishing returns of having too many cards
Can you have too many credit cards? Not necessarily.
However, I am a fan of simplicity. So having three or four is ideal for most folks. Fifteen is probably about as senseless as a Kanye West Presidential run.
If you have too many cards in your possession it can be tough to keep track of which card offers what rewards for each purchase category. This will make it more difficult to use the right card at the right time. And because the rewards of some cards overlap, rewards also diminish with each additional card you add to your arsenal.
Also, you must watch out for those annual fees! If you’re paying annual fees for credit cards that you barely use, this will hurt you more in the long run.
You can get as intense as you want to when it comes to diversifying the rewards that you earn by using credit cards for everyday purchases, but you’ll find that the most important cards in your possession will be the initial 3 or 4 that cover the major purchasing categories.
Don’t forget to use your rewards credit card properly when making purchases!
A recent Bankrate study found that many cardholders aren’t getting the benefits that they signed up for because they forget to use their card when checking out. It doesn’t matter how many credit cards you have in your possession if you forget to use them!
More than 4 in 10 are paying with cash or a debit card instead of a card that offers major rewards on that grocery store purchase.
For example, if you consistently forget to use your American Express Blue Cash Preferred® at Aldi or Lidl – two of the best grocery stores in the nation – then having that card isn’t doing you much good. Don’t make that mistake! It could be helpful to write the main spending category in Sharpie on the front of that card as a reminder to use it properly.
Another important step is redeeming the rewards that you earn. Bankrate found that almost 3 in 10 cardholders are forgetting to redeem the rewards that they’ve racked up over the months. It’s important to stay organized with your arsenal of cards and the rewards that you are earning so that they aren’t being wasted.
Credit card perks go beyond traditional rewards
Credit cards offer many additional benefits too. Secondary rewards like rental car coverage, travel insurance, and cell phone insurance really add up!
When you are deciding which credit cards you need in your life it’s important to take those secondary benefits into consideration.
For example, I use my Costco Visa card whenever I purchase a major electronics item because it doubles the manufacturer’s warranty. This card also offers no foreign transaction fees, damage & theft protection, and roadside assistance dispatch service. Those additional perks are above and beyond the solid cashback rewards offerings that I get when I use the card at restaurants, gas stations, and of course, at Costco.
Don’t forget to factor in the welcome bonus when you sign up for a new card
Credit card rewards go beyond just cashback and secondary benefits. When you sign up for a new credit card you’ll often receive a lump sum cash payment or a sweet point incentive for hitting a spend amount in a specific timeframe. This only amps up the value that this new credit card can provide you.
Travel cards often offer the best welcome bonuses. Before you apply for this new card, make sure that you’ll be able to easily hit that spending amount in order to snag that bonus. Also, make sure that the rewards you’ll get from that card on an ongoing basis will be worth the annual fee if there is one attached to that card.
Best Credit Card Welcome Bonuses Right Now:
The bonus on the Chase Sapphire Preferred Card is at an all-time high of $1,250 right now when you redeem points for cash through Chase Ultimate rewards. You snag that welcome bonus when you spend $4,000 in the first 3 months. That’s pretty incredible for a card that has an annual fee of $95.
The sign-up incentive on the Capital One® Venture® Rewards Card credit card is $600 if you spend $3,000 in the first 3 months. This card also comes with a $95 annual fee so that welcome bonus is pretty fantastic too. Learn how to apply for this card here.
If you own a business, the Chase Ink Business Preferred can snag you a $1,000 welcome bonus – and that bonus skyrockets to $1,250 if you redeem it for travel! You’ll have to spend $15,000 in the first 3 months in order to seize that bonus, though. Many businesses won’t have trouble meeting that threshold and that bonus provides some real incentive to align your expenses intelligently in order to make sure you don’t miss it.
How Many Credit Cards Should You Have?
Ultimately, we recommend having 3 or 4 credit cards that specialize in offering you various rewards for how you spend money. But make sure that you manage those accounts well in order to take full advantage of the rewards that are available to you.
And if you can’t handle that card responsibly by paying the balance off in full every month, then it’s best to avoid using credit cards altogether for the time being. By the way, notice that I didn’t tell you to cancel your cards, just to stop using them.
Canceling a card will adversely affect your credit so put that card on ice instead. Those enticing rewards aren’t worth it if you’re paying the credit card company massive money in interest every month.