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Why having a credit card can be beneficial
Having a credit card — and using it responsibly — is a good way to build strong credit, says Ted Rossman, senior industry analyst at CreditCards.com.
Obtaining good credit is “essential” to qualify for loans such as a mortgage or car loan, and for other things such as buying a cell phone, renting a car or finding a job, the Consumer notes. Federation of America op. Strong credit also helps consumers qualify for lower borrowing costs.
However, not everyone uses a credit card in a financially optimal way. According to the US Federal Reserve, 82 percent of American adults will have a credit card by 2022. About half of them carried a balance at least once from month to month in the previous year. Since credit cards often have high interest rates, having a balance (i.e. not paying off a full card each month) can significantly increase household expenses.
Rossman recommends that first-time cardholders purchase a card with no annual fees and no interest, at least initially, and that they pay their balance in full and on time each month. It is important to ensure that the interest rate will be relatively low after the first no-interest offer has ended.
There are virtues to sticking to just one card, experts said.
One of the biggest: It’s easy to keep track of just one set of expiration dates and other important details, such as card benefits, said Bruce McClary, senior vice president at the National Foundation for Credit Counseling.
“Limiting yourself to one card helps simplify the debt management process,” McClary said.
Advantages of having more than one credit card
However, there can be drawbacks to having only one credit card. First, not all companies will necessarily accept your card brand.
“In those cases, it might make sense to have two different card types: Visa and Mastercard, for example,” McClary said.
Similarly, a consumer running a business can separate their personal and business expenses by using two cards, he added.
Consumers can prioritize a solid all-round card as their primary card, experts said. For example, a good “baseline” for users might be a card with no annual fee that pays 2% cash back on all purchases, Rossman said.
I would say two cards is optimal… and three would be maximum to keep finances simple.
Kathy Curtis
founder and CEO of Curtis Financial Planning
A second would likely be based on how consumers shop and how different cards distribute rewards and benefits, experts said. For example, frequent travelers can take advantage of a card that focuses on travel rewards and has no foreign transaction fees.
“Here you have to make some choices for yourself,” McClary said. “You have to think about your day-to-day life, where you shop and where you have the best chance of redeeming the points you earn.”
Websites like NerdWallet and CreditCards.com can help determine the best rewards card for you, McClary said.
In addition, having a second credit card, or more, can help build one’s credit utilization ratio, said Curtis, founder and CEO of Curtis Financial Planning.
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This is the ratio of what consumers owe to their total credit limit. Credit utilization is a major determinant of one’s credit score and a credit score that is too high can lower your score.
According to experts, cardholders should keep their ratio below 30% on all accounts. So in a simple example, a consumer with a $10,000 credit limit would not want their balance to exceed $3,000.
Having more than one card increases one’s total credit limit, and when used responsibly can reduce one’s credit utilization ratio.
“If a person needs more than one card to keep their credit utilization ratio low, then I would say that’s a good reason to have more than one card,” Curtis said.
How many credit cards is too much?
But this is a balancing act.
If users have too many cards, they can sometimes look like overeager borrowers and lower their credit scores even if they have low balances, McClary said. Lenders get the perception of a “compulsive borrower” when there are too many loan applications in a short time frame, he added.
Distributing applications — one or two in a six-month period and no more than five in a two-year period — is generally safe, Rossman said. That includes applications for all types of debt.
In addition, having multiple credit cards can increase the cost of carrying credit if they have annual fees, McClary said.
It is “critical” for consumers who are disorganized or tend to overspend and have balances on their cards, rather than paying their balances in full each month, to limit their cards, perhaps to just one, said Curtis.
“If a person is more fiscally responsible, I see no harm in having more than one card,” she said.
In general, consumers should always aim to pay off their balance each month, automate their monthly payments and secure a card with the lowest possible interest rate, she added.
How many credit cards do you need? It’s not
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