When it comes to credit cards, how much is enough? How much is too much? These are questions that are often asked by consumers, and the companies that formulate credit scores keep the real answers a closely guarded secret. While there is no one-size-fits-all formula, what matters most is not the number of cards, but how much you use them, how well you use them, and how long you use them for.
How many should you have?
The short answer here is that you should have a few, because some are better for different types of purchases, and because building an excellent payment record with a few cards is better than just one. According to myFICO.com, which is the only place that regular consumers can go to find out their actual FICO score, the average "high achiever" (those consumers with the highest scores) has a total of seven credit card accounts.
Without getting too deep into the benefits of individual cards, it is easy to see why some cards are better for certain situations. If you fly a lot, airline cards can help you earn miles, and most often double benefits when using the card for travel. Some department stores issue rewards of up to 5% when you use their credit cards to buy merchandise. There are cards that offer disproportionately high benefits on almost any type of product or service you can think of (gas, groceries, hotels), so it's easy to see why you may want several cards to choose from.
How much should you use?
More important than the actual number of cards is how much of your total available credit that you use.
An available credit line of $10,000 can be achieved with either 10 cards, each with a $1,000 limit, or with two cards that each has a $5,000 limit. All other things being equal, there is almost no difference in the eyes of the credit bureaus.
One of the common credit myths is that to get a great score, you should not carry any balances from month to month, but nothing could be further from the truth. The average consumer with a score of 800 or above carries a total balance of around $8,500 on their cards; however this represents just 7% of their total available credit. In other words, the average high achiever has built up their total credit line to more than $120,000, but uses just a small amount of it.
This shows lenders the ability to use credit responsibly, which is the real point of the scores. It is simply too hard to judge whether someone who never uses their available credit will be responsible with a loan, where they will indeed carry a balance from month-to-month. In fact, according to myFICO, the amounts owed on all open accounts makes up a whopping 30% of one's credit score. The number of accounts is nowhere to be found in the formula!
Keep 'em open, and keep 'em current!
This is perhaps the most important piece of the puzzle. Payment history (35%) and length of credit history (15%) combine to make up 50% of the credit score formula. In other words, you ideally want not only a flawless record of paying your bills on time, but a very long history of doing so. This is why no matter how responsible you are with credit when you're younger; it is very hard to break into the top credit tiers.
The average age of high achievers' credit accounts is 11 years old, with the oldest account a whopping 25 years old. When you combine the account ages with the fact that 96% of high achievers have no late payments on their record whatsoever, it's easy to see why this would impress prospective creditors.
The Foolish bottom line
It's not how much credit you have, it's how you use it and how much of it you use. It's not a bad idea to intentionally open credit cards that combine for a higher credit limit than you'll ever need, as long as you can restrain yourself and live well within your means. So, if you really want a credit card from your favorite department store, go for it. As long as you just use a small percentage of the credit line they give you, it will most likely be a help to your score over the long run.
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