Posted by Ryan on January 14th, 2008 in Credit and Debt

How many credit card offers are you forced to refuse on a regular basis? There are generally multiple offers in the mail a day, and you can barely go shopping without being offered 15 percent off your purchase by simply opening a store credit card. Discounts, lower fees, better rates, travel perks. Sounds tempting, doesn’t it?

When is enough, enough? How many different Visas do you really need? After all, the 15 percent you saved on your plasma TV disappeared long ago with all the interest being paid to your credit card that helped finance the purchase. In this case, more is not better.

According to Bankrate.com, most Americans carry between five and ten credit cards, and some have as many as 50. All of those numbers are probably too many. After all, the more cards you have, the more artificial justification you can create for purchasing items you don’t need or can’t afford.

The number of credit cards you should have depends on your spending habits, what you can pay off and how much credit it would take to keep your debt-to-credit ratio below 30 percent. Two is probably ideal, but more can be acceptable, and they should be major credit cards (Visa, Master Card, American Express, Discover Card). If you are going to have a store credit card, keep only one that you pay off in full in order to take advantage of the incentives.

Let’s look at a couple of scenarios:

Too Many: Too Many has twelve credit cards and has difficulty tracking her spending and expenses on each one. She fills out credit applications every time she is offered one when shopping. Too Many is not really concerned about how much she is spending because she makes a great living. She makes $300,000 a year, her monthly expenses are about $15,000, and each of her cards has about a $20,000 credit limit.

Solution: Too Many should consolidate her cards down to two or three major credit cards. This will make tracking expenses easier, reduce paperwork, billing confusion and eliminate the variances in interest rates. The frequent applications are hurting her credit score, and having too much credit can actually impede her ability to be approved by a creditor in the future. Lenders don’t like to see an unreasonable amount of access to credit compared to income.

Max Out: Max Out brings in about $5,000 a month. He has one Visa that he uses for all expenses: gas, bills, groceries, etc. Max Out pays off his credit card every month, and has a second Discover Card he only uses as a backup in case of an emergency.

Solution: Max has demonstrated discipline with his credit cards, but is hurting his credit score by maxing out his credit card. He should try to increase his available credit, use his other card more often to balance out the debt-to-credit ratio, and possibly open another credit card if necessary to keep the ratio below 30 percent on each card. Using his other card regularly will also establish a credit history with that card and improve his creditworthiness.

Over Extended: Over Extended spends $2,000 a month on his credit cards to purchase everything and then more. But, Over Extended’s monthly income only allows him to pay $1,200 a month. Four of his eight credit cards are maxed out. He definitely does not qualify as a Smart Shopper.

Solution: First, Over Extended should negotiate his rates and transfer some of his balances to the unused credit cards in order to bring the debt-to-credit ratio below 30 percent on each card. If possible, remaining cards should be closed. He should be careful not to close too many cards though. If the debt-to-credit ratio goes above 30 percent as a result of closing too many cards, that could have an adverse effect on his credit score. Also, the newest cards should be closed first and cards with a longer credit history should be kept open. Creditors like to see a long credit history. Lastly, Over Extended needs to get his expenses more in line with income, and develop a plan to pay down those balances.

The number of credit cards a person should have depends largely on their capability to control expenses, the discipline and ability to pay the debt, and the available credit-to-debt ratio. Two major credit cards are ideal for management purposes, but credit bureaus will not penalize you if you have a couple more – as long as you demonstrate a good repayment history.

The important thing to remember is that using credit cards responsibly is important. Lenders like to see a long, responsible credit history. Secondly, credit cards have fraud protection that cash and checks don’t offer, so they are a great alternative to cash. Lastly, it is possible to actually profit from using credit cards, as we discussed in Don’t Cut Up Your Credit Cards.

Millionaire Money Habit: Take a look at how many credit cards you have and determine if you need to adjust your spending, request more credit, or close a couple of accounts in order to improve your credit score. Remember a long credit history is good, so close your newer cards first. -RT

How many credit cards do you have?

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