Credit cards offer significant advantages. They enable you to establish a credit history, while also providing opportunities to accrue points, miles, and cash back for routine expenses, travel bookings, or even when linked to streaming services and subscriptions. With Experian reporting that the average American possesses nearly four credit cards, many individuals are already enjoying these benefits. Nevertheless, mishandling or losing track of your credit card portfolio can lead to consequences that outweigh the advantages.
Having multiple credit cards may result in the payment of numerous annual fees, redundant benefits, or the possession of airline cards that are no longer in use. Without proper management, there’s also the risk of adversely affecting your credit score and falling into overwhelming debt. We sought insights from credit card experts to elaborate on the importance of conducting an inventory of your accounts and how to judiciously select which cards merit retention.
Review Your Credit Card Portfolio
It’s essential to assess your credit card portfolio, especially if you have cards that no longer align with your needs or spending habits. Ted Rossman, a senior industry analyst with Bankrate, suggests that reevaluating your credit cards at least once a year is prudent, as your lifestyle can change, and so can the market.
To compile an inventory of your credit card accounts, obtain a complimentary credit report. Federal law grants you the right to request one free report annually from each of the three major consumer reporting agencies: Equifax, Experian, and TransUnion. The simplest method is to visit AnnualCreditReport.com for a copy, but you can also call (877) 322-8228. This report will detail all your credit card accounts, offering comprehensive insights into your past credit usage, outstanding debt, and payment history.
Are Your Credit Cards Meeting Your Financial Needs? The fundamental rule for responsible credit card use is paying your balances in full and punctually each month. While reward credit cards provide attractive benefits, any rewards gained can be negated by interest charges and late fees if you carry a balance.
This underscores the significance of initially analyzing your credit report. Rod Griffin, senior director of consumer education and advocacy at Experian, emphasizes the importance of understanding your credit card usage, including whether you consistently pay your bills on time, have any late payments or missed payments, and benefit from credit card rewards or discounts. Griffin also highlights the necessity of “establishing a budget and identifying ways to align credit card usage with your budget.”
Lastly: Creating a Budget You Can Truly Stick To “A budget empowers individuals to live and spend within their financial means, preventing impulsive credit usage,” Griffin explains. “Unplanned credit utilization is the primary cause of unmanageable debt.” Notably, Experian reported that in 2021, consumers carried an average credit card debt of $5,221.
What Is the Ideal Number of Credit Cards?
According to Griffin, there is no universally “ideal” number of credit cards. He asserts, “From a credit scoring standpoint, one or two cards are sufficient. However, each individual possesses a unique credit history and financial circumstance.”
When managed responsibly, multiple credit cards can prove advantageous. They offer the potential to reduce your credit utilization ratio, which measures the portion of available credit that you utilize. This, in turn, can positively impact your credit score. Additionally, different cards may offer varying benefits, enabling you to maximize your spending in various categories.
Nevertheless, Griffin offers a word of caution for individuals who struggle with spending discipline. Managing multiple credit cards can be challenging for them, potentially leading to overspending and difficulties in tracking expenses and due dates, ultimately resulting in missed or late payments.
The Implications of Closing a Credit Card Account
Griffin notes that closing a credit card might be a sensible decision in specific scenarios. For instance, if you possess a credit card with a high annual fee that no longer delivers valuable benefits, closing it can lead to annual cost savings.
However, closing a credit card can have adverse consequences as well. Griffin explains, “Closing an account means forfeiting the available credit limit associated with that card, resulting in a temporary reduction in credit scores due to an increase in your total utilization rate.”
If you do decide to close a credit card, Griffin advises doing so when you do not intend to apply for new credit within the next three to six months. “Although the closure may initially cause your credit score to drop, it typically rebounds within a few billing cycles once it becomes evident that you have not accumulated substantial new debt,” he states.