If you look at the number of credit cards that you have and try to decide whether you have too many credit cards do you answer may not be a simple one or one that applies to each in every person. Before you attempted to close down active credit card accounts you should know that closing and opening credit card accounts affects the credit score. Credit score uses information present on your credit report regarding the various credit cards you use as well as further information. What is the best number of credit cards that you should have is generally decided upon the impact that the credit cards are having on your credit score. There are however other factors that you can take into consideration as well. Listed below are a few of the general points that you should put through a checklist in order to determine what you should do with your credit cards.
Debt to Income Ratio
Generally lender will measure your debt to income ratio by calculating what your total limit of debt would be if you were to max out all your credit cards and your current income level. This means that the more credit cards you have the higher will be your debt to income ratio. With person who has a high debt to income ratio a lender may be more hesitant to extend further credit. This is because the lender may believe that you already have enough line of credit available to you which you could use to get yourself under a lot of debt. Extending you a further line of credit puts the lender at risk of losing money if you are able to handle the debt and default on the credit account.
Credit Utilisation Ratio
credit utilisation farms about 30% of your credit score. It is the ratio between the two credit that you utilise on your credit card and the total credit limit available. Typically the credit utilisation on any one credit card as well as all the credit cards jointly should be around 30% of the total credit limit. Having many credit cards is you the opportunity to increase your credit utilisation ratio by charging a high balance on the credit card. However, this does not mean that cancelling a credit card will help your credit utilisation ratio. In fact closing a credit card account will increase your credit utilisation ratio because the overall credit limit available to you will decrease with the cancellation of a credit card.
The two ways of managing your credit utilisation ratio is not only to have only the number of credit cards that you need but to also keep the balance on each credit card down to about 30% of the credit limit.
Mix of Credit
the credit score considers another factor that is known as mix of credit accounts in order to calculate the credit score. This forms about 10% of the total credit score calculation. So credit cards are not the only thing that is going to affect your credit score. Having three credit cards may have the same impact on your credit score as having 10 credit cards. Cancelling one or two credit cards may not have that much impact on your credit score if you have other positive information present on the credit report and especially other credit accounts of different kinds such as a home loan, personal loan, automobile loan etc.
Difficulty in Managing Credit Cards
as mentioned in the first paragraph credit score is not the only criteria by which you should judge whether you have too many credit cards or not. If you have a problem managing multiple credit cards then maybe it is time to downsize. Having more credit cards will make it all the more difficult to keep track of your monthly payments, interest rate etc. If having too many credit cards is proving hard to manage where you run the risk of defaulting on a credit card by missing a payment and forgetting to pay, then it may be better to cancel the extra credit cards that you do not use or need. Makes managing credit cards because there are too many of them may have an impact on your credit score if you happen to mess a payment. Since a single late payment can stay on the credit history for a period of seven years you can avoid this negative information by having just the number of cards that you can manage easily.
How many credit cards is enough
You can build a good credit history by using 1-3 credit cards. After that, you need to determine your own requirement. You should not have many credit cards if you are going to use them to incur debt. Have credit card for the purpose of utility and need.