They call him “Mr. Plastic Fantastic,” and he’s a retired financial planner who claims to hold 1,496 active credit cards in his name. Guinness World Record holder Walter Cavanagh seems to have amassed that vast number in part as a lark with a friend.
If no one, even Mr. Cavanagh, really needs 100-plus credit cards, many of us conclude we need more than one. But how many more makes sense? Here’s how to decide.
Know Your Personal Limits
Before considering the limits of your credit card, consider the limits of your self-discipline. The goal is not to access more credit simply for the sake of spending power. Rather, ask yourself what amount of credit can you reasonably handle. That is, to what degree will you need to limit yourself before the credit card companies do it for you?
Today’s financial system makes it too easy to increase our personal debt, largely through credit cards. Journalist Neil Gabler writing for The Atlantic summarized that "credit represents a sea change from the old economic system, when financial decisions were much more constrained, limiting the sort of trouble that people could get themselves into — a sea change for which most people were unprepared.”
Be honest with yourself about your ability to control spending. Don't allow yourself the latitude to live beyond your means. In the end, the penalty for such a lifestyle will be painful.
Understand Your Credit Utilization Ratio
Your credit-utilization ratio is simply your credit card balance compared to your available credit limit. Conventional wisdom suggests that credit card holders should keep this figure below 30%. In truth, there is no official rule for the optimal credit-utilization ratio.
The more important takeaway is that you’ll need to limit the degree to which you access your available credit. Stay below the limit. The less you use, the more your score will improve over the long-run. "A high utilization rate is a sign that you may be experiencing financial difficulty and is a reliable indicator of lending risk," explains Experian. Eventually, a higher rate “hurts credit scores and can cause lenders to be reluctant to extend additional credit.”
Holding more cards will naturally increase your total available limit. However, that's not an invitation to access all that credit. To keep your score flying high, you must show the credit card companies that you can hold credit without actually using it. The highest credit scores are often awarded to those with credit utilization scores in the single digits.
Know How Cards Can and Can’t Affect Your Credit Score
Don’t acquire cards simply to boost your credit score with the agencies who create and monitor this vital financial statistic. Such a strategy is flawed in at least two respects.
First, what most helps you credit score is the quality and reliability of your payment history, how manageable is the debt you owe, and your length of your credit history. Next, it might be true, in theory, that carrying more cards might result in a higher total credit limit — which, in turn, might drive down your utilization ratio, and boost your score.
However, there’s a countervailing consequence of opening multiple cards that could easily swamp any benefit from lower utilization ratio. While inquiries to agencies about your credit score to verify your identity, known as “soft pulls,” shouldn’t affect your credit score, the same isn’t necessarily true of the “hard pulls” lenders make when you apply for a new card, in which your entire credit history is obtained. While a single hard pull will out only a minor and temporary dent into your credit score, a slew of such inquiries can drive down your score, especially if they are made by multiple lenders.
Before starting an application for another card, or multiple cards, explore the option of requesting an increase of the limit on one you already hold.This approach might be a faster, safer, and simpler way to working down your ratio. (Of course, spending less on your card would have the same effect.)
Finally, instead of choosing cards for your score choose them for their benefits. Selecting cards that offer a range of reward programs suited to your lifestyle will save you money in the long-run. Remain cognizant of annual fees. Do the math to ensure the rewards you will get more than offset the yearly cost of the card.
As Shakespeare once wrote, “To thine own self be true.” Take this sage advice to heart. Deciding how many credit cards to own begins with a conversation with yourself.