Multiple credit cards can knock down your credit score — use them well
If you have multiple credit cards, you need to manage each of their payment cycles systematically.
Increasing digitization has made it common to own multiple credit cards and is in fact a growing trend among the millennials. With every card company offering various reward points, consumers sometimes end up signing for additional cards without thinking through.
‘What is the ideal number of credit cards to be owned by an individual?’ - is an often-asked query. While some believe to own as many as possible, some prefer only one or even none; believing that having several credit cards can adversely affect your credit score. Is this a valid belief? Below points will help you understand how having multiple credit cards can affect your credit score.
(Mis)-Managing too many accounts: If you have multiple credit cards, you need to manage each of their payment cycles systematically. If you use all of them regularly but miss paying their bills, it can show poorly on your credit report. This will deter any bank from offering you additional credit or loan because you are unable to manage your existing credit accounts. To avoid being in this situation, get your spending in order and more importantly your repayment. Missing your payment by a single day can cost you from 0% before due date to 30% after the due date. Maintaining a good payment history is extremely important since it is responsible for around 35% of your credit score.
Overleveraged: Availing credit liberally can lead you to a situation of having too much debt (through single/multiple credit cards and any other loans). This will reflect in your credit report. Banks avoid overleveraging customers that already have excessive debt. They generally deny any subsequent loan or credit applications from them.
Applying for multiple credit cards in a short span: Applying for multiple credit cards within a short time indicates desperation for money and may cause a dip in your credit score. Banks consider it risky to lend money to such customers. If you have applied for several cards in the recent past, be a disciplined user by controlling your expenses and make regular payments, in a few months you will find your credit score increasing.
Closing credit cards: The solution for concerns related to multiple credit cards is not to close down a few cards. Closing a credit card, decreases your available credit limit, and thereby increases your credit utilization. Your credit utilization ratio weighs in significantly on your credit score. So, having multiple credit cards can be beneficial provided you do not use a lot of the available credit.
Inactive credit cards: If you have a credit card lying unused, a better solution would be to make a small expense and repay it on time, instead of closing it altogether. Inactive accounts are accounted for separately in your credit report and may lower your credit score. However, if you are convinced that you will not be able to manage this account well, then closing it may be a better option in the long run since you also need to pay an annual fee for keeping it active.
Imbalanced credit: As a best practice, it is recommended to have a good balance of secured (e.g. home loans) and unsecured credit (e.g. credit cards). If you only have credit cards and no other loan, your credit history is not perceived to be balanced. This can also affect your credit score.
Banks look for signs that indicate your stability and reliability as a consumer of credit. Paying your bills on time is the surest and often the simplest way to maintain a good credit history. If you think you have maintained a good credit history and still have trouble getting approved for loan or credit, it may be worthwhile to check your credit report. It is possible to find errors in the credit report and the earlier you find it, the sooner you can get it rectified.The writer is co-founder of MoneyTap.