TL;DR: Yes, having too many credit cards can hurt your credit score.
Here’s the kicker though — having multiple credit cards can hurt your score, but not necessarily.
Credit-gurus are often quick to point out the potential negative effects of opening too many credit cards. However, while having multiple cards can negatively affect your credit score, it is not so much how many cards you have but how well you manage them and how you obtained them that matters.
Many different factors go into your credit score, such as number of accounts, total account balances, payment history, number of hard inquiries, etc, and the number of credit cards you have is just one piece of this puzzle.
If you have a lot of cards and manage them poorly, then having multiple cards can hurt your credit. However, if you manage multiple cards successfully, then having several accounts can actually be beneficial to your credit score.
To figure out the whole story, let’s first take a step back and answer the central question: What is credit and how is your credit score determined?
What is Credit?
Credit is basically borrowed money that you can use to purchase goods and services.
When you put a payment on your credit card, you are essentially borrowing money from the credit card company with the promise of paying it back later in the form of card payments, plus any agreed-upon interest fees. Essentially, credit is a way to access money that you may not currently have with the intention of paying it back in the future.
In general, there are 4 major kinds of credit:
- Revolving Credit: Revolving credit gives you a maximum credit limit which you can make charges up to that limit. A portion of your total balance must be paid off each month. Most common credit cards are revolving credit.
- Charge cards: Similar to revolving credit, except the balance must be paid off in full each month.
- Service Credit: Agreements with service providers such as gas and electricity companies are a form of service credit. You receive these services with the expectation you will pay for them every month.
- Instalment credit: instalment credit involves a creditor loaning a specific amount of money with an agreement to pay back the amount plus any interest fees in a certain amount of time. Car loans and mortgages are examples of instalment credit.
Using credit affects one’s credit score.
One can think of their credit score as a measure of how “financially trustworthy” they are.
Typically, a person builds their credit by applying for cards, taking out loans, and using services while paying off those charges in a timely and consistent manner.
A higher credit score signifies to lenders and creditors that you are a responsible borrower and can make payments on time. Conversely, a low credit score indicates you have a poor history of paying back money, and you will be less likely to qualify for loans, credit cards, and accounts.
Having a good credit score is essential for financial stability. Good credit determines your ability to make a major purchase or take out big loans, such as for a house or a car. Landlords and employers also check your credit score for housing and employee applications.
Your credit score is basically a summary of your financial behavior that is used to determine whether you are eligible for borrowing or lending.
What Determines My Credit Score?
Typically, 5 major factors are considered when calculating your credit score.
Payment History (35%)
The single biggest factor affecting your credit score is your payment history. Payment history includes payments from all of your debt, though credit card payments are usually the biggest variable. Credit companies tend to focus on payment history the most because it directly relates to how responsible of a borrower you are. Many companies will report missed payments to a credit bureau if they are even one day late.
Debt-to-Credit Ratio (30%)
Debt-to-credit is a ratio that measures your outstanding debt compared to total available credit. The ideal ratio is 30% meaning that you want to try to have no more than a third of your credit tied up in debt at a time. This is one area where having multiple cards can help your credit score. Having multiple cards give you more credit which can improve your debt-to-credit ratio, provided you stay below 30%.
Credit History Length (15%)
Creditors prefer applicants who show a good history of responsible borrowing and payment. Building a good history of credit over time improves your score and lets creditors know you have a certain level of financial stability. People with the highest credit scores (700+) have an average account age of 11 years for their cards. If your credit history is short, then too many cards can negatively affect your score.
New Credit (10%)
Adding a new credit account can cause your score to drop a few points, once when the creditor makes an inquiry on your account and again when the account is actually activated. A high-volume of inquiries in a short amount of time is usually a red-flag for credit companies and lenders.
Type of Credit (10%)
Lenders also like to see borrowers who responsibly manage many different forms of credit. Having all you account be one type, such as credit cards, can hurt your score. The ideal credit portfolio should include credit accounts from cards, loans, retail accounts, and more.
How Can Multiple Cards Hurt My Credit Score?
Having multiple cards by itself will not necessarily hurt your score, but it makes it more likely you will underperform in one of the main areas that determine your overall credit score.
Having multiple cards can hurt your score if they are poorly managed. First off, having multiple credit cards typically means more monthly payments. If your income cannot cover all the necessary payments, then multiple cards can quickly rack up a bunch of fees in missed payments and cause your credit to take a massive hit.
If you are going to have multiple cards, your best bet is to keep a few solely for emergencies and not put any other charges on them. That way you can keep your total payments in check.
High debt-to-credit ratio
If you have multiple cards, the temptation will be to use them frequently.
Of course, this runs the risk of raising your debt-to-credit ratio. Sure, you may have a larger maximum limit on charges with more cards, but what matters is not so much your total credit limit, but how much of your total limit you are currently using.
Again, if you are going to use multiple cards it is a good idea to keep a few with a zero balance and only bring them out in the case of emergencies.
When you apply for a credit card, credit lenders make an inquiry to your records to determine whether to accept you or not. Inquiries normally cause your credit score to drop a few points and then again when the credit account is actually activated.
Having multiple hard inquiries on your credit report lowers your score and is a red flag for lenders, particularly if there are multiple inquiries over a short period of time
Low variety of credit
Having the bulk of your credit be in the form of cards is generally a bad idea for your credit score. Lenders like to see borrowers who can effectively manage multiple types of credit accounts at once.
Credit cards might be the easiest way to get credit, but having too many cards reflects poorly on borrowing/spending habits. Your credit portfolio should be diversified to include other kinds of credit.
How Can Multiple Credit Cards Help My Credit Score?
On the flip side, if you are a savvy and financial responsible borrower, having multiple credit cards can be beneficial for your credit score. Successfully managing multiple credit accounts looks good for your financial reports.
If you have multiple cards but are good at keeping your balances/total usage low, then your total debt-to-credit ratio will be lower, which positively affects your credit score. Say you have 2 cards with a total limit of £5,000 and are currently using £2,000.
Applying for another card with a £2,000 limit raises your total credit limit to £7,000, which decreases your debt-to-credit ratio from 40% to 29%. Keep in mind that this strategy only works if you keep your balances low on your cards.
Applying for a higher limit card but keeping the balance on it £0 is a good strategy to bolster your credit score. Alternatively, you could ask for a limit raise for a current card and so avoid the hit to your score from the hard inquiry for a new card.
Additionally, having multiple cards can reflect positively on your experience managing different forms of credit, provided you also have other kinds of credit on your portfolio.
Similarly, successfully managing multiple cards over a long period of time can positively impact your credit score. Again, it is not so much the exact number of cards you have, but the variety of credit you manage and how effectively you manage it. You could have 10 different credit cards but if you manage them responsibly you can still have a good credit score.
How Many Credit Cards Should I Have?
Fun Facts: According to the 2017 Experian State of Credit Report, the average American has 3.1 credit cards.
In the UK, the average number of credit cards held per person in the UK is 1.7.
In truth, there really isn’t a magic number of credit cards that is optimal for every person. The number of cards you should have should be dependent on your prior credit history, income, spending habits, and pre-existing debt.
For example, if you are a novice credit user, the primary aim should be to build your credit with one or two cards by paying off your total balance each month.
This is a good option for students and young professionals who need to start building a credit portfolio. There are several credit cards out there designed specifically for credit novices to build their score which offer low-interest rates and fees.
As you become more experienced with credit, the number can be more flexible, but should always take into account your total income as to keep your debt-to-credit ratio under 30%.
It always helps to have an extra card or two on hand, in case of emergencies or lost/stolen cards. Different cards also offer different rewards.
For instance, you may have a card that gives you 5% cashback on purchases like groceries, hotels, and gas.
Another card may give you frequent flyer points which you can put towards a plane ticket.
Combining cards with different benefits can be an effective way to manage finances.
For example, you could use your 5% cashback card in January, February, and March, then use your default 1% cashback card on all purchases for the rest of the year.
If you have multiple credit cards, it is normally a bad idea to close accounts without considering the impact on your credit score.
Closing accounts shortens your credit history and closed accounts eventually are removed from your report, both of which can hurt your score. Closing accounts also reduces your total credit limit, which can negatively affect your debt-to-credit ratio.
Before You Apply for a Card…
Consider the following:
- Being accepted or rejected does not affect your score either way. So if you are going to apply to a card, make sure it is one you will be accepted for. Being rejected means you lose points and will not have anything to show for it.
- Applications affect people’s credit differently. The higher your credit, the lower the point drop from an inquiry as compared to someone with low credit.
- It takes about 6 months to recover from lost points from an inquiry, so space out your applications by at least 6 months if possible.
Tips to Keep Your Credit Cards Under Check
Having good credit is a necessity for many areas in life which makes building and managing credit essentially mandatory.
Here are some tips to avoid the credit-debt trap and manage your different credit accounts effectively.
- The first tip is to never make a charge that you cannot afford to pay off immediately. Ideally, you should have the liquid savings to pay off any charges you incur. If you are going to use your card for everyday purchases, it should be with the understanding that you will immediately pay it off at the end of the day. The sole exception to this rule is a credit card for emergency situations. The ideal card for emergencies should have a high limit and low-interest rates.
- You should also try to make more than just the minimum payment on your cards. It takes much longer to pay off your debt this way and you will end up paying more once you factor in interest charges (unless you have a 0% interest period). Ideally, you would pay your balance off in full each month. If this is not feasible, at least pay a good chunk above the minimum payment.
- Start an emergency fund so you do not have to rely on credit cards for emergencies. Try to set aside a separate bank account and funnel in a small amount of your paycheck each month. That way if you run into an emergency, you have the cash immediately on hand and don’t have to pull out your cards.
If all else fails and you cannot manage to pay off your credit cards, there are debt-relief programs that can cancel your outstanding debts. However, these programs typically severely negatively affect your credit score and can remain on your credit reports for up to 10 years.
Let’s go over the main points we covered.
- Credit refers to money that is borrowed from agencies with the agreement to pay it back after a certain amount of time
- Your credit usage/behaviour determines your credit score, which affects your eligibility for borrowing.
- The major factors that determine your credit score are your payment history, debt-to-credit ratio, credit history length, number of inquiries, and type of credit.
- Having multiple credit cards can negatively affect your score by making it more difficult to make payments, raising your debt-to-credit ratio, increasing the number of hard inquiries on your account, and having a low variety of credit.
- Multiple credit cards can be beneficial for your credit score if they are managed effectively and responsibly.
Having good credit is necessary for many things in life, so everyone should have some experience managing credit. The key things to remember are to keep your payment history in check and keep a low debt-to-credit ratio.