The cashiers at the store offer them, your mailbox is always full of them, and even your bank seems to be constantly promoting them. Credit card offers bombard us at every turn, and a lot of them have some pretty enticing rewards and promotions that may have you wondering, “what would happen to my credit if I did apply for these? How many credit cards is too many?”
The answer may surprise you, because the quantity of credit cards does not affect your credit as much as how you manage them. You can do more damage with one single credit card than with a dozen cards if you don’t use it responsibly. Here’s why.
Credit Score Calculations
Your credit score is calculated based on a few different factors, and some are more important than others. These include:
- Payment history: 35%
- Amounts owed: 30%
- Length of credit history: 15%
- Credit mix: 10%
- New credit: 10%
And here’s how having several credit cards can impact each factor contributing to your credit score.
Your credit score is meant to tell lenders how financially responsible you are, so it makes sense that the largest factor is your payment history. If you have always made your payments on time, you will likely have a decent credit score, since more than one-third of your score depends on this. However, when you add several credit cards to the mix, it can be easy to lose track of payments, annual fees due for each one, and other balances you owe. Simply stated, the more payments you owe, the more likely you are to miss one, and this will hurt your credit the most.
Credit utilization (Debt to credit ratio)
Your credit utilization, or debt-to-income ratio, is simply how much credit you use out of your available credit. If it is high, lenders may think you rely too much on credit or live outside of your means. However if you keep this number low, it is a good sign that you are financially responsible and don’t let debt consume you.
Having several credit cards can actually help this area, because more credit cards means more available credit, which could decrease your ratio if you don’t use very much of your available credit. But then again, credit cards are easy and convenient to use, so it could be easy to increase this ratio by reaching for your cards more often than not.
Age of Accounts
This category looks at the average age of your accounts, not just your oldest account. The purpose of this category is to show lenders a consistent history of financial responsibility, and opening several cards in a short period of time can be a red flag that you’re strapped for cash or impulsive. Try to space out your applications by a few months at least, longer if possible, to keep this average high.
Type of Credit
There are two basic forms of credit: revolving credit and installment. Revolving credit includes credit cards, lines of credit, and other forms of credit that fluctuate. Installment credit refers to something attached to an asset, such as a mortgage or car loan. Your credit mix, or the various types of credit you use, contributes toward your overall credit score. Having too many credit cards can affect this, but not by much, especially if you’re responsible about your spending and have other types of credit as well.
Credit applications come with a hard inquiry on your credit, which is basically just a note that you applied for more credit. This hard inquiry can ding your score a few points but only temporarily. However, you should avoid applying for several credit cards at once, or in the same time frame that you plan to apply for a car loan or mortgage, to ensure your score is the best possible for your application. Similarly, applying for a lot of credit in a short amount of time looks bad, like you’re strapped and desperate for cash, and can be seen by lenders when you apply for a loan.
The bottom line is that you can still attain and maintain a high credit score while having several credit cards, as long as you make your payments on time, keep a low credit utilization ratio, and space out the applications.