Thursday, January 7, 2010

How Many Credit Cards is Too Many?

While one in seven Americans has at least 10 credit cards, the average is four, according to a report from Experian. The national average interest rate on credit cards as of November 2009 is 12.64%.

So what is the correct number of credit cards a consumer should have to most effectively manage and optimize their overall credit profile? The answer is not simple; it’s not the number of cards you have, but how you manage them.
TIP: utilize your credit card each month but do not allow the balance to exceed more than about 30% of your credit line.
Always pay at least the minimum payment but pay extra when possible and pay ON TIME.

By doing this your credit card utilization and payment history provides a strong contribution to your credit score and risk profile, which should help you obtain lower interest rates on new credit in the future.

Beware: Although you make your payment on time every month, if you are regularly “maxing out” your credit card limit, you are actually negatively impacting your credit score and profile. Your overall credit profile would be better served spreading the expense over two or three cards and maintaining the card limits at or below 30%.

The reality is that you can have excellent credit with one well-managed credit card with a positive established history. The primary variable is how you manage your credit versus how much credit you have access to use. The general makeup of a credit score is based: 30% on payment history, 35% on the amounts you owe compared to available credit, 15% on the length of your credit history, 10% on newly established credit and, finally, 10% on the types of credit you use.
Having the right balance of credit cards and overall access to credit can be extremely helpful. Additionally, well-managed credit cards will assist you in establishing a stronger credit profile and better credit scores that can potentially lead to lower interest rates and better terms when applying for new home loans, auto loans, credit cards or even insurance.
Think carefully about adding new credit cards. Do you need the extra card to manage your credit profile better or are you exposing yourself to a greater and potentially unmanageable debt situation? Whatever the reason, it’s important to know that when you add a new credit card, your credit score will likely suffer a temporary drop until you have established a payment history with that card.
Finally, don’t make the mistake of canceling your older credit cards, even if they have higher interest rates than ones you may get on newer cards. Remember, 30% of your credit score is based on payment history and 15% on the length of your credit history. Keep that older, well-established card for that reason and use it once in a while on smaller purchases.

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