The higher your credit score, the more likely you are to qualify for a mortgage with a lower interest rate. But does having too many credit cards in your wallet hurt this score? It doesn’t have to. But you do need to be careful. Click through to learn more.
How credit cards impact your credit score
Credit cards can help your credit score in two important ways.
Every time you make an on-time payment on your credit cards, this payment is reported to the three credit bureaus, Experian, Equifax and TransUnion. Build a history of on-time payments and your three-digit credit score will gradually but steadily rise.
You can also boost your credit score by maintaining a low credit-utilization ratio. This ratio measures how much of your available credit you are using. The lower this ratio, the better it is for your credit score. If you have three credit cards with a total credit limit of $15,000 and you have $2,000 of credit card debt, your credit-utilization ratio is $2,000 divided by $15,000, or 13%.
There is no official credit-utilization ratio guaranteed to boost your credit score. But Equifax says that most lenders prefer their borrowers to have a credit-utilization ratio of 30% or lower.
Too many credit cards?
Having several credit cards could help lower your credit-utilization ratio. That’s because with more cards, you’ll have a higher total credit limit. You’ll then need to spend more to build a higher credit-utilization ratio.
But having too many cards can hurt your credit score if having all that plastic available encourages you to spend more than you can pay off each month.
The best way to use a credit card is to only charge what you can afford to pay off in full each month on or before the card’s’ due date. This way, you’ll never build a high credit-utilization ratio. You also won’t get hit with the high interest rates that credit cards charge on unpaid balances.
But if you do start to overspend? It could lead to financial troubles that could cause your credit score to plummet. Say you charge so much that your minimum required monthly payments on your cards begin to soar. If they get too high, you might struggle to make your minimum payments each month.
If you make a credit-card payment 30 days or more past its due date, this will be reported as a late payment to the credit bureaus. And a single late payment could cause your credit score to fall by 100 points or more. These late payments also remain on your three credit reports for seven years.
The bottom line? There is no perfect number of credit cards to keep in your wallet. The right number depends on your own financial habits and health. The key is to make your payments on time and to never carry a balance on your cards from month to month. That will help boost your credit score and keep you from running up more debt than you can afford to pay off.
We welcome the opportunity to put our accounting expertise to work for you. To learn more about how our firm can help advance your success, don’t hesitate to contact Kathy Corcoran at (302) 254-8240.
©2024
