Use Best Practices for Credit Cards | News, Sports, Jobs
Americans paid off some $83 billion in credit card debt in 2020, but didn’t necessarily close their accounts. They shouldn’t have either. Having a certain amount of available credit is good for your credit report and can help you qualify for better deals.
According to a Credit Karma report, the average American owns 2.5 credit cards. Some have two; for others it is three. Of course, outliers can have more or less. The number is everywhere, which begs the question: how many credit cards should I have?
There is no perfect answer like so many other things in life because personal finance is personal. However, you can use some essential criteria as a guide.
How many credit cards should I have?
A magic formula for calculating the number of credit cards you need does not exist. Credit cards have many benefits, such as cash back, travel points, and building credit. However, whether you need a credit card depends on your financial situation and spending habits. Therefore, you need to consider your income, your ability to pay your bills on time, your budget, and your financial habits.
Having multiple credit cards comes with a lot of responsibility. After all, it’s not free money. Your ability to budget and live within your means are strong indicators of your ability to manage your credit wisely. Credit cards can end up costing you more in the long run and have a significant impact on your long-term financial goals if not used correctly.
For some people, having one credit card is enough. This allows them to build credit, earn rewards, and track spending while paying off each month’s balance. For others, it might be three credit cards.
Of course, some people prefer not to have a credit card. They don’t like the risk of missing a payment or uncontrollable expenses that can be associated with credit cards, or maybe they’ve had a bad experience in the past.
Are there too few credit cards?
There is no punishment for not having or using a credit card. However, credit cards can help build credit. Unfortunately, banks are hesitant to lend money to someone who has failed to repay their debt in the past.
High usage rates are a problem for people who only have one or two cards. If you don’t pay your credit card balance on time, you run the risk of giving the impression that you’ve maxed out your line of credit. Think about it. If you have two cards with a combined maximum credit limit of $10,000 and have a balance of $5,000, you will have a utilization rate of 50%. On the other hand, if you have four credit cards with a combined maximum credit limit of $20,000 and you acquire a balance of $5,000, you will have a utilization rate of 25%.
Although neither of these utilization rates is optimal, a utilization rate of 25% seems better than 50%. It can be harder for creditors to judge your creditworthiness when you don’t have a lot of credit experience. At the same time, having too many cards can be problematic.
How many credit cards are too many?
We don’t have a perfect number of credit cards to have. So we don’t know how many are too many. But, whatever that number, we know that too much is not a good idea.
You may already know that opening too many close credit cards can negatively impact your credit score. However, a few other issues may arise.
Credit cards require monitoring. It’s something more to track in your budget and set up for paying bills. Plus, you increase your chances of spending more than you intended when you use credit cards.
As you build your credit card portfolio, ask yourself the following questions to help you determine if you have too many:
Can I track my credit card spending correctly? Will I pay off each card’s balance before its due date? Will I lose money by overpaying? Credit card best practices
There is nothing right or wrong with owning a credit card. It’s personal. Remember that cards work for some people and not for others. So if you’re using a credit card, be sure to do so wisely. Credit can improve your financial situation or destroy it.
Here is a list of good credit card habits to develop:
1) Use a budget. Use your budget to track credit card spending by category. Don’t spend more than you plan to pay back at the end of the month.
2) Pay the monthly balance before the due date. There is no rule that you must pay the balance on the due date. Instead, pay money back to the credit card as you spend it. This way you see the money leaving your main checking account as if you were using a debit card or cash. If you don’t like the idea of logging in every day, make it a goal to pay off the credit card balance every week.
3) Regularly check your credit score. Pay attention to your credit usage and credit score with credit reporting agencies like Experian, Transunion or Equifax. You might need more credit one day. So you want to make sure you’re handling it well.
4) Maintain a low utilization rate. Don’t go over your credit card balance. Instead, pay them off as you accumulate them to maintain your credit score.
5) Minimize the frequency of opening new accounts. Have a plan for your credit. Don’t open accounts just to open them and keep track of which ones you have. You have to watch out for credit on your behalf. Frequently opening accounts can hurt your credit score, thus harming your financial situation later on.
6) Look for cards with no annual fees and low interest rates. Building your credit with a credit card is acceptable. However, you don’t want to pay more than necessary. Opt for cards with no annual fees and low interest rates.
7) Avoid cash advances. Even in the case of prepayment, a cash advance comes with additional fees. So avoid them for simplicity. Instead, only spend the money you have.
Credit cards are useful in various situations. For example, they are convenient and can bring you rewards. However, the opposite may be true in some cases. It’s one more thing to think about every month and one more bill to pay. So do you need it?
It’s a personal decision based on your financial situation and financial habits. Not having a credit card is acceptable. In other cases, holding three cards works better. It depends on your ability to repay them without having to pay interest and to control your expenses.
No matter how many credit cards you have, remember to follow good credit card practices to build good credit, maximize rewards, and minimize credit card spend.
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This article was produced by Savoteur and syndicated by Wealth of Geeks.