Monday, February 1, 2016

Credit Cards and Credit: How many is too many?

Sometimes people contact me in order to ask certain personal finance questions.  I received one question today that I felt was worth bringing to your attention.  This person was recently denied a credit card for having "too many open accounts."  It is true that this person has several credit accounts, but is not maxed out on any of them.  Furthermore, this person has more credit available than what they have in use, and make all payments on time.  In other words, they have relatively low balances.  This person was confused about the decline because they felt as though they had been doing everything in a responsible manner.

In general, a person with "too many credit cards" presents a higher risk to the lender.  Lenders especially dislike seeing a number of credit inquiries in the past 12 months.   They look upon it poorly.  They  think to themselves, "Why does this person need so much credit?"  Let's consider this from another perspective (the lender).  Having too many credit cards is a somewhat opposite problem as that of having no credit cards, but a problem nonetheless.  When a lender sees someone with no credit cards they think "How do we know you're going to pay us back?  You have no track record."  With someone that has too many, they think "Danger, danger!  Red alert!  If this person's financial world turns upside down, what are they gonna do?  Max out all of these credit cards, then we will be one of 10 companies in line with our hands held out!  No way!  Stay away from that one!"

...And you have to admit, they have a point.  One of the risks that they take when they lend  to you is the fact that the credit card will be unsecured debt, meaning they can't come and repossess anything in order to make their money back if you fail to pay.  Quite frankly, if you were to file a bankruptcy, they very well might be out of luck! So, when they see "too many accounts," they tend to get a little skiddish.

Now for the magic question...  How many credit cards is "too many"?

Unfortunately, there is no right answer to this question.  Since there are a number of things that compose your credit, and each individual situation is different, that can't be boiled down to one simple number.  With that being said, here are a couple of guidelines.

  1. If you don't need to credit, don't open the credit card.
  2. Aim to have only 2-6 credit cards.
If you have more credit cards that this, don't rush out and start closing your credit accounts.  That could lower your credit score by making it look like you have a higher amount of debt compared to the credit available.  This is one of the factors involved in the composition of your credit score.  

For further information about what goes into composing your credit score, try going to the websites of FICO, Equifax, Experian, or Transunion.

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