5 Powerful Reasons to Consider Owning Multiple Credit Cards: Uncover the Pros and Cons
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Owning multiple credit cards has become increasingly common, and while it can offer various benefits, it also presents challenges and risks. Determining if holding multiple credit cards is right for you involves an understanding of your financial habits, spending needs, and the impact on your credit health. Here, we’ll explore the advantages, potential downsides, and actionable tips for managing multiple credit cards, complete with real-world examples and guidance from financial experts.
1. The Benefits of Having Multiple Credit Cards
Owning several credit cards can offer advantages, especially if you’re strategic about managing them.
a. Increased Credit Limits and Better Credit Utilization
When you own more than one credit card, you have access to a higher combined credit limit. This can help reduce your credit utilization ratio, which is the percentage of credit you’re using relative to your total available credit. A lower utilization ratio positively impacts your credit score, signalling to lenders that you’re not over-relying on borrowed funds.
Example: Suppose you have two credit cards, each with a $5,000 limit, and you use $1,000 on each. Your total credit utilization ratio would be 20% ($2,000 out of $10,000), which is below the 30% recommended threshold.
b. Enhanced Rewards and Cash-Back Opportunities
Different credit cards offer various rewards for specific categories like groceries, dining, travel, or gas. By selecting the right cards for your spending habits, you can maximize cash-back offers, travel points, or rewards, helping you save money on everyday purchases or plan for future trips.
Example: A frequent traveller may choose one card that offers miles for airline purchases and another that provides rewards for hotel stays, combining them to reduce travel expenses significantly.
c. Specialized Benefits and Perks
Many credit cards offer additional benefits such as purchase protection, extended warranties, travel insurance, and concierge services. Owning multiple cards can allow you to access diverse perks, ensuring you’re always covered.
Authoritative Source Insight: According to a study by CreditCards.com, cardholders who leverage multiple cards for different rewards can save an average of 3-5% on their monthly expenses by targeting high-spending categories.
2. The Risks and Downsides of Holding Multiple Credit Cards
While the benefits are compelling, managing multiple credit cards requires discipline and careful planning. Here are some of the pitfalls to consider.
a. Potential for Increased Debt and Overspending
More credit can lead to more temptation. Without strict budgeting, it’s easy to accumulate debt, especially when juggling multiple cards with different billing cycles and due dates. Carrying balances on multiple cards with high-interest rates can quickly snowball, creating a financial burden.
Example: Let’s say you owe $500 on one card with a 19% APR and $300 on another with a 22% APR. If you only make minimum payments, the accumulated interest could keep you in debt longer than you’d anticipate.
b. Difficulty Keeping Track of Payments
More cards mean more payment dates to remember. Missing payments, even by a day, can incur late fees and hurt your credit score, as payment history is a crucial component of credit scoring models. Maintaining an organized payment schedule is essential to prevent negative credit impacts.
Actionable Advice: Set up automatic payments or reminders for each card. Many banks also offer apps that allow you to monitor multiple accounts in one place.
c. Increased Annual Fees and Maintenance Costs
Certain cards come with annual fees that only pay off if you make use of the rewards. Accumulating cards with fees can increase your expenses, particularly if you’re not maximizing each card’s benefits.
Authoritative Source Insight: According to a report by NerdWallet, around 38% of cardholders with multiple cards pay annual fees on at least one of their accounts. It’s advisable to compare rewards with costs before deciding on high-fee cards.
3. Actionable Tips for Managing Multiple Credit Cards
Successfully owning multiple credit cards requires a clear strategy and financial discipline. Here are actionable steps to help you make the most out of your cards while avoiding pitfalls.
a. Align Credit Cards with Your Spending Habits
Each card should serve a specific purpose that aligns with your spending habits. If you frequently dine out, choose a card with cash-back rewards on dining. If you travel often, prioritize a travel card with miles or points for hotel stays.
Example: If your monthly grocery spending is significant, a card that offers 5% cash back on groceries can save you a notable amount over time. Be sure that each card adds value to your spending needs.
b. Optimize Your Credit Utilization Across All Cards
As discussed, maintaining a low credit utilization rate is beneficial for your credit score. Instead of maxing out one card, spread out your spending to keep utilization low on each card.
Actionable Advice: Aim to keep utilization below 30% of each card’s limit. By distributing expenses, you avoid hitting high usage on a single card, helping maintain your score.
c. Periodically Review Each Card’s Benefits and Fees
Evaluate whether each card is still serving its intended purpose. Credit card issuers often update their benefits, so it’s worth checking periodically to ensure you’re still receiving value for any fees you pay.
Example: If you have a travel card but haven’t travelled in a while, consider downgrading or replacing it with a no-fee cash-back card that better aligns with your current spending.
4. How Multiple Credit Cards Impact Your Credit Score
Understanding how multiple cards affect your credit score is vital. The primary factors influenced by multiple credit cards are credit utilization, average account age, and recent credit inquiries.
a. Credit Utilization
As noted, multiple cards increase your total available credit, lowering your utilization if managed wisely.
b. Average Account Age
Opening new accounts can decrease the average age of your credit accounts, which may slightly impact your score in the short term. Over time, however, if accounts are managed responsibly, the score typically stabilizes.
c. Recent Credit Inquiries
Each new credit card application triggers a hard inquiry, which can temporarily decrease your score by a few points. Limiting applications to once every few months can help mitigate this.
Authoritative Source Insight: According to FICO, about 10% of your credit score is influenced by new credit inquiries. Therefore, it’s advisable to space out new applications, especially if you’re planning a large purchase or a loan application in the near future.
5. Is Multiple Credit Cards Right for You?
Whether or not owning multiple credit cards is right for you depends on your personal financial goals, discipline, and spending patterns. Here are some scenarios to help you decide:
- Multiple Cards May Be Right For You If:
- You have stable income and disciplined spending habits.
- You regularly pay off balances in full to avoid interest charges.
- You’re strategic about using rewards and benefits, offsetting any fees with the value you gain.
- Multiple Cards May Not Be Ideal If:
- You find it challenging to track payments and due dates.
- You’re prone to overspending and often carry a balance.
- You’re in the process of major financial decisions, such as taking out a mortgage, where a new inquiry could affect your eligibility or rates.
Final Thoughts
Owning multiple credit cards can be advantageous, provided you have a clear plan and financial discipline to manage them effectively. From leveraging rewards to improving credit utilization, the benefits are numerous if approached strategically. However, if mismanaged, multiple credit cards can lead to debt accumulation, high fees, and credit score damage. Consider your lifestyle, financial health, and long-term goals to determine if having multiple credit cards aligns with your needs.
For more personalized advice, consult a financial advisor or use resources from authoritative sources like Consumer Financial Protection Bureau (CFPB) to understand better how multiple credit cards could impact your financial wellness.