There is no perfect number as to how many credit cards a person should have. What works for one person may not work for another, however, there are a few things that might help you in deciding how many credit cards you require.
If you are a new credit card user, it is recommended that you stick to one credit card, learn financial discipline, and see if you need other one. Getting another credit card can end up being tremendously expensive for you if you do not know how to manage your finances. It can lead to late payments, increasing debts and you can potentially end up with a lower credit score.
If you are an average credit card user in India, having two to three credit cards is ideal. There are multiple perks of having more than one credit card like purchase rewards, deals and discounts, and cashback offers. If managed efficiently, more credit cards can boost your credit score over time. It can also provide additional financial security and act as a backup.
There are many advantages and disadvantages of owning multiple credit cards. It’s up to you to evaluate whether your financial situation and expenditure habits allow you to have a new credit card. Below are a few points that can help you in determining this :
Advantages of Having Multiple Credit Cards
Optimize Reward Earnings
Having multiple credit cards gives you access to a variety of reward schemes and helps you take advantage of the ones that provide the maximum benefit on a purchase. You can choose specific credit cards based on the reward category on which they provide the maximum benefit. For example, you can maximize your rewards by using a travel rewards credit card while you are on a vacation to book airline tickets and hotel rooms. These cards also offer great perks that can add value to your daily life.
HDFC Diners Club privilege credit card helps you get exclusive dining benefits so if you love dining out, this card will be highly rewarding for you. Credit card issuers are tapping into specific reward programs so that consumers can avail cards that are better suited to their lifestyle.
Low Credit Utilization
The credit card utilization ratio is the ratio of your outstanding credit balance to your overall credit limit across all accounts or simply put it is the percentage of available credits that you have used. It is recommended to keep the ratio below 30% otherwise it can hurt your credit score. If you have one card with a credit limit of Rs 1 Lakh and have a balance of Rs.80,000, your credit utilization ratio would be 80%. Having multiple credit cards increases your available credit and drives down your credit utilization ratio. You can decrease your credit utilization by spreading your balance across three or four credit cards and consequently maintain a higher credit score.
Protection From Fraud
Having only one credit card for all purposes can leave you vulnerable to fraud. The chances of fraud increase with a higher purchase value and if your card is compromised there is more risk associated with it. You’ll also have to be without your credit card until the replacement arrives within the next few days. Having multiple cards dilutes the risk and meanwhile, you can use another card to back up your spending.
There are many situations when your credit card doesn’t process the payment or isn’t acceptable to make the transaction. If that is your sole credit card, you might not be able to make a purchase, hence it is useful to have a backup credit card yourself. When planning for a trip make sure to have an extra credit card. If something goes wrong and one credit card isn’t able to process the payment, you can rely on the second one.
Multiple credit cards can also act as a back-up during financial emergencies when you might need a large sum of money, the credit can be spread across different cards without hurting your credit score
Disadvantages of Having Multiple Credit Cards
Compounding Credit Card Interest Can Lead to Debt
It can be risky to have more than one card if you are prone to spending excessively and can’t pay the bills timely. Depending on the interest rate of your credit card, the balance will compound over time and can land you in financial trouble. You’ll also be charged a late payment fee, and since that is added to your balance, you’ll be charged interest on your fee as well. You can keep the debt off by paying your monthly balance in full but if you are only able to pay minimum payments, your debt will end up growing quickly.
It’s a good idea to understand how compound interest works and track your spending accordingly. However, it is easy to get overwhelmed when you have multiple cards to track and the debt keeps increasing over time. Since credit card interests are usually high (annual percentage rate can range from 39% to 43%), it is recommended that a person sticks to one card until he is sure of paying off the balance timely to avoid debt piling up over time.
Multiple Bills and Payment Dates
Multiple credit cards can lead to confusion and a complicated financial life if you aren’t organized. You’ll have to keep a track of more bills and payment dates along with keeping your credit utilization ratio below 30% if you wish to maintain a higher credit score. If you are going through stress, don’t have time to track your expenses, or just can’t take the burden of keeping up with multiple payment cycles, it is best if you stick with a single credit card.
Risk to Credit Score
There are multiple reasons why your credit score is at risk when you have multiple credit cards. Payment history is a significant reason, if you aren’t able to pay off your debt for more than 30 days, it is reflected in your credit score. Your credit score is likely to drop once you make a late payment.
Another reason associated with a lower credit score is multiple credit card applications in a short span. A “hard inquiry” is added to the credit report every time you put in a new application for a credit card and these inquiries. Hard inquiries are responsible for 10% of your credit score and it is important to note that these inquiries stack up if you apply for a new credit card and can impair your credit score eventually.
Your credit score is a reflection of how well you manage your money and it helps the lender in predicting how likely you are to repay their borrowed amount. A good credit score is helpful in loan approvals, lower interest on credit cards, better insurance rates, and a higher limit to borrow money from banks.
Multiple Annual Fees
Not all credit cards charge an annual fee but if you have cards that fall in the reward, premium, or secured card category, the annual fee of the credit card will likely be high. Along with your balance, you’ll also be liable to pay the annual fee on time. With multiple credit cards, you might end up finding yourself paying a higher annual fee than you can earn back with rewards. This can eat up your budget if not taken into account. Hence it’s essential to consider the annual fee when you are applying for a new credit card.
You Might End up Spending More
It’s easy to fall into the temptation trap of credit cards. When you get new credit cards, you have access to more credit and you are likely to spend more. For most people, it is tough to restrain themselves from using the available credit. This can put them in an increased debt which can pile up over time. If you have a history of overspending and mismanaging your credits, it’s better to stick to a single credit card. Another way to limit your spending is to assume that your credit card is a debit card, this way you can only allow yourself to spend less than what you make every month.
Most of the time, it’s not about whether more than one credit card is good or bad but what matters is how you use those cards. Some people are comfortable using just one credit card while others can effortlessly juggle between three to four.
There are a few other things to consider while applying for another credit card.
- Whether you have previously paid your credit card balance timely. If you aren’t yet financially disciplined, it might be a bad idea to get another card.
- Whether you have successively applied for multiple cards in a short term. This can take a hit on your credit score and decrease it.
- Whether you are likely to overspend. If you think that you won’t be able to avoid the temptation to use the increased credit limit, don’t consider getting another card.
The intention of this article is not to overwhelm but inform you before you make the big decision of applying for your first credit card or a subsequent one. There are many benefits to having more than one credit card but if you think that one credit card would suffice, go with that decision. Eventually, you will be the one repaying your debt and you don’t want to regret the purchases that you made. However, a responsible credit card user always knows how much to spend and how to make the most out of your credit cards irrespective of how many cards you have. Ensure that having several credit cards will work in your favour and not against you and use each card to your advantage.