The right answer depends on quite a few factors and can vary from person to person. However, there are a few general rules of thumb when it comes to collecting credit cards, so that you can optimize your wallet while also reducing any negative impact to your credit.
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How Many Credit Cards Should You Have?
Everyone has a different idea of the ideal number of credit cards. For some, one piece of plastic in their wallet is more than enough. For others, there is a credit card for each occasion.
The average American agrees that a credit card is worth carrying, though. According to a recent study by Experian, the average American carries 3.1 credit cards. However, it’s also important to note that the same study found that the average American also carries an average credit card balance of over $6,300.
So, while carrying just over 3 credit cards is technically “normal”–as is holding over $6,000 in credit card debt–that doesn’t mean this is wise. This is definitely a situation where it’s more important to find your ideal number, rather than just going along with the average.
How Do Credit Cards Impact Credit And Is It Bad to Have Too Many Credit Cards?
Each credit card, and how it’s utilized, will impact your credit score differently. For instance, if you carry two cards that are maxed out, you’ll see a much more negative impact than if you had five cards with a $0 balance. It’s all in how you use what you have.
With that said, there are a few aspects of your credit cards that will affect your credit score.
The most important impact regarding your credit card collection relates to your balance(s). It doesn’t matter nearly as much if you have a large number of credit cards, as long as you pay them off. If you’re utilizing most of your available credit and carrying around balances, though? It’s time to reconsider your habits.
Your credit utilization is the ratio of your lines of credit to the balances owed, and accounts for about 30% of your overall credit score. You want to aim for your credit utilization to stay below 30% if you want the impact to be minimal. Anything above that will start to affect your credit score and your likelihood of approval for new cards.
Carrying balances from month-to-month is also an easy way to get in over your head in credit card debt. This is a clear indication that you should probably hold off on applying for any new credit cards, as well as make a plan to get out of debt. The only exception would be if you plan to responsibly use a new 0% APR balance transfer offer to pay off the debt earlier (and for less).
Each time that you apply for a new credit card, you’ll see a hard inquiry (or “pull”) noted on your credit report. They’ll stick around for two years, having a minimal impact on your score overall.
In moderation, these inquiries aren’t an issue. However, if you acquire more than a few of them a year, it can drop your credit score and raise eyebrows with potential new lenders. They may wonder why you’ve applied for credit in so many places, in a short period of time. They may also question your loyalty to credit cards, or ask whether you’re simply churning cards for rewards.
The goal? Keep your hard inquiries to 2 or 3 a year at max, if at all possible. This might mean holding off before getting that new credit card you’ve been eyeing, and just sticking with the ones you have for now.
Average Age of Accounts
When you’re opening and/or closing credit card accounts, one area of credit score impact that you’ll notice is with your average age of accounts (AAoA). This number is, as the name implies, the average length of time that you’ve held credit-based accounts. The higher this number is, the better.
Every time you add a new credit card to the list, your AAoA will drop. Every time an old, closed credit card falls off of your credit report, your AAoA will drop. Of course, this number will rise over time as your other accounts age, but this number is impacted significantly by a slew of new account openings.
Which Cards to Keep
Perhaps you’re looking at your wallet right now, pondering the value of the existing credit cards that you carry. Some of them might be worth closing (we will talk about that next), but there are plenty of reasons to keep a credit card open… even if you don’t use it regularly.
No Annual Fee
So, what if you’re carrying around a credit card that you rarely use? Well, if it doesn’t charge an annual fee, it’s typically worth keeping open.
Holding on to an old card with a $0 balance may seem silly, but it really doesn’t hurt you in the end. In fact, closing the account would lower your available credit, which could impact your utilization ratio elsewhere. So, in this case, “if it ain’t broke (or doesn’t cost you money), don’t fix it.”
Some credit cards offer perks that you can’t come by elsewhere, or are very difficult to acquire. For instance, you may have a card that offers you access to premium airport lounges, which you enjoy on your frequent work trips.
Or maybe a card you rarely use snags you free checked bags on a certain airline, upgraded status with certain hotels or rental car companies, or access to a number of other benefits. It might even give you an annual travel credit that cancels out your annual fee.
If you use these benefits, consider keeping the card open. This is especially true if:
- You use the benefits often enough that the value exceeds (or cancels out) any annual fee charged.
- You would have trouble getting these same perks outside of the card (such as hotel status).
- You would pay more for those perks by buying them outside of the card, and find them to be worth the cost of the card’s annual fee (such as premium airport lounge memberships, which can easily run $400-600+ a year, but are often offered with cards that charge less than that annually).
Rewards Aligned with Spending
One of the best benefits of credit cards today lies in cash back rewards. You can make hundreds–if not thousands–of dollars back each year, just by buying the things you already buy and using the right credit card in the process. If you carry a credit card that aligns well with your spending, consider keeping it open. This is especially true if it doesn’t charge an annual fee or the annual fee is cancelled out by rewards earned (and/or benefits offered).
For instance, credit cards like the Blue Cash Preferred® by American Express offer 6% cash back on groceries (for the first $6,000 spent annually) and 3% cash back on gas, with 1% being given on everything else. The vast majority of my household’s spending is on groceries–over $1,200 a month–so it makes perfect sense for us to use this card. That’s $72 in cash back each month from food alone!
Which Cards to Close
There are also some really great reasons to close a specific credit card, whether you don’t use it or find that it costs you money each year.
The Annual Fee Isn’t Worth It
I recently closed my oldest credit card–something that most personal finance gurus would gasp over. However, it made sense to me for a number of reasons. One reason is that they started charging a high annual fee and offering nothing extra in return.
I’d had this credit card since high school, when I was solicited the week after I turned 18. It served me well over the years, and helped me develop a strong, lengthy credit history. However, this card wasn’t a “good” one, by any means. The few times over the last decade and a half that I carried a balance, this card charged a shocking 35% interest. It offered no rewards, no benefits, nothing.
Two years ago, they started charging an annual fee. I got it waived the first year due to my loyalty over the years, but the company refused to waive it again this year. I wasn’t about to pay $79 a year for a card that didn’t even offer cash back, so I cancelled the card.
Yes, my AAoA will take a small hit, but it will recover thanks to my other lengthy accounts. Plus, I have an extra $79 in my pocket each year.
If you have a card that’s charging an annual fee without offering you anything worthwhile in exchange–especially if you don’t actually use the card–it’s probably worth cancelling.
Rewards Don’t Match Your Spending
You may have a rewards-based credit card that sounds excellent, but if it doesn’t align with your spending, it may not be worth keeping.
For instance, there are premium travel credit cards out there offering 5% back on all airline purchases, regardless of carrier. This is an excellent cash back return. But if you rarely fly, it doesn’t do you much good.
Unfortunately, most of the best rewards-based cards also charge an annual fee. So, if you are paying a fee for a cash back card that doesn’t really align with your personal spending habits, it might be worth cancelling–or changing to a no-fee product.
It Has a Low Credit Limit
If you’re dead-set on closing a credit card but can’t decide which, look at the credit limit. When all other factors are equal (or similar), such as the age of the account and the annual fee, a lower credit limit will have a smaller impact on your credit score.
By closing a credit card with a high credit limit, you risk increasing your credit utilization overnight. If you instead close a card with a low line of credit, the impact to your utilization will be much smaller.
What to Ask Yourself Before Cancelling a Card
Before you run off and close a credit card, be sure to really look at what the product offers (or doesn’t). Here are a few things to ponder:
- Do I get more back from the card than I pay in an annual fee?
- Can I ask to downgrade to a no-annual-fee product with the same issuer?
- Am I taking advantage of all of the perks offered by this card?
- Is this my oldest credit card and, if so, can my credit score afford the impact?
Questions to Ask Before Opening a Card
Before you go and add all of those enticing new credit cards to your wallet, take a second to ask yourself some questions first. It may be wise to slow your roll a bit, perhaps even missing out on lucrative bonus offers for the sake of your creditworthiness.
- Am I likely to be approved for this card, based on my credit score? (If the answer is no, it’s not worth the hard inquiry to try just yet.)
- Will this card meet my needs/match my spending/earn me more rewards than an existing card in my wallet?
- Is there a similar product out there that offers better rewards or a better sign-up bonus?
- If applicable: Will the annual fee be worth the expense, or will I earn more than that amount in rewards/benefits?
- Can I get the same benefits from a no-annual-fee card?
- Am I in a position to spend wisely, manage this account well, and am I already out of credit card debt?
- If I already have credit card debt and plan to use a 0% APR balance transfer offer from this new card to eliminate my debt faster, am I disciplined enough to not add to either balance?
The ideal number of credit cards varies from person to person. The number of cards you should be carrying depends on your credit history, your spending habits, and why you plan to use it.
Whether you’re looking to add a few new cards to your collection or reduce the ones collecting dust in your wallet, the starting point is the same. Sit down and look at where you spend the most money, how/if you travel, and what types of rewards best suit your lifestyle. Then take a look at what you have and the many products on the market today.
What is your biggest reason for closing or opening a credit card account?