Credit 101
Here are the facts on revolving credit and how it can affect your credit score either positively or negatively.
What happens if you get a peek at a friend's wallet, and they have more credit cards than you? Does it mean that you need to open another account? Here’s how to know if you’re on the right track with how many credit cards you should have.
Sources vary, with TransUnion claiming that cardholders average 2.69cards each. Those with very good credit scores (a FICO of 800 or more) average three cards per person. There are also a few outliers, including one man who amassed more than 1,400 cards as part of a collection.
Having multiple cards alone isn’t enough to change your score, because your score factors in a few behaviors. In fact, having several credit cards with zero balances can improve your score over time. This is because you have a low overall “utilization ratio,” which is your total debt compared to your total available credit.
The danger comes in when you have a high number of credit cards, and you're spending on all of them. A high utilization ratio can make your score go down.It can also hurt your score to have one card charged up almost to the limit, even if you have low credit utilization across all of your cards.
One way to avoid negatively impacting your credit score – no matter the number of cards you own – is to pay at least the minimum balance by the statement due date.
Anytime you get a new credit card, you're opening an account. This is good in someways because your utilization ratio will increase. But it can also temporarily hurt your score.
When you’re being considered for a new line of credit, the lender needs to pull your credit history and see that you are worthy of new credit. This credit request is considered a “hard inquiry” in that it shows up on your credit history and can even pull your score down a little. To avoid this, only apply for cards when you need them.
Anytime you close a line of credit, your total available credit number goes down. If you owe any money on any of your other cards, your credit utilization ratio may be harmed. This means your credit score could take a hit.
Another danger to closing accounts is that if it’s an older account, its closure decreases the overall age of your accounts. Lenders like to see you with long credit histories. Closing an old, unused account will leave you with only your newer accounts to establish account age. This could cause your score to drop.
Having many credit cards seems like a good thing, right? It can be, but there are also drawbacks. Even if you're an ace at keeping track of all the due dates, payment amounts, and rewards programs, it takes time to manage it all. If you're considering opening up yet another new credit card, consider these potential pitfalls.
Many cards don’t have an annual fee—such as the Petal credit card—but some of the higher-earning perks cards do. Will you get a good return on a card with a $99, $150, or even $299 annual fee? Even if you manage to earn the fee back on a card with miles, points, or cash, it becomes more challenging to do this with many cards. Prioritize which cards you’ll need to spend on to get enough value, and consider how adding another card to the mix may complicate things.
When you add up all the things you pay for in a month, it can be daunting. Since you ideally want to pay off cards in full before the grace period expires, you must know the right time to pay each—and it may not be on the due date. Paying late or not having enough money in the bank for your automatic payment due date can lead to late fees and potentially harm your credit score.
Do you know if your rewards points expire or not? You may not have thought about this, but some programs won’t let you hold on to your points or miles forever.Even if your rewards are good for the life of your accounts, what happens if you want to close your credit line? Read through the terms and conditions before you apply for your next card to ensure that you won’t lose your perks if you close your account.
Someone with $10,000 or even $100,000 in open credit accounts may not consider a purchase as seriously as if they were limited to cash-only funding. Not everyone treats credit differently than cash, and many are responsible enough to have healthy credit lines without going overboard. You'll want to assess your attitude toward credit, however, before taking on anything new.
There can be perks to opening up additional lines of credit, and they’re worth considering if you’re on the fence about a new account.
The simplest benefit of having more cards is that you have access to more credit. For those who rarely use their new cards or who use small amounts and then pay them off right away, there’s also the potential for a lower debt utilization ratio. Your credit score may go when you get approved for a new credit line.
If you fly the same airline at least once a week, it makes sense to consider a branded airline card to get rewarded every time you fly. There's also merit to looking at cards that give you cash back on gas or make it easy to turn your points into statement credit. No single card offers all the features we would want, so consider a variety of options to get the best credit card experience.
If you’ve managed to handle a single credit card responsibly, you may be ready to open one or two more. Questions to ask yourself include:
● Could my credit score benefit from a better utilization ratio with a card I won’t use?
● Are there perks that I’m not getting from my current card?
● Do I need a different card issuer (Mastercard, VISA, Discover, etc.) to use at retailers I shop often?
Sometimes, getting another card can make our consumer life easier.
You likely have too many cards already if you answer “yes” to any of these questions:
● Am I having a hard time juggling due dates, minimum payments, or reward redemptions on my existing cards?
● Do I pay more in fees than what I earn in rewards?
● Am I losing cards or unable to remember which card to use in each scenario?
If you cannot manage your cards, it doesn't hurt to take one or more out of the rotation. Just avoid closing paid off accounts, as they can hurt your credit score.
If you’re paying too much on interest and you qualify for a cheaper card, you may want to open a new account. Be wary of balance transfer offers, however, as these often lure you with a low APR but charge a “transfer fee” of 4-6%. If you’re going to pay off your card in a short time anyway, this fee can be more costly than the interest you would have paid with your old card.
Are you considering a new line of credit? At Petal, we offer access to a competitive, no-fee card with higher limits for users. Visit our website to get started today.
Petal Card issued by WebBank, Member FDIC.
Here are the facts on revolving credit and how it can affect your credit score either positively or negatively.
