How many credit cards should you have if you want an excellent credit score? According to Ethan Dornhelm, vice president of FICO Scores and predictive analysis, there's no perfect number.
A credit score is a personal rating that determines the interest you pay for a loan, or whether you qualify for a loan at all. It's calculated based on payment history, how much you owe, your length of credit history, the types of credit you have and how often you apply for new credit.
"The sheer number of credit card accounts that a consumer has is much less important to the FICO Score than how the consumer is managing those accounts," Dornhelm tells CNBC Make It. "Are they paying their bills as agreed? Are they keeping their balances low relative to available credit limits? These actions are the most significant drivers of their FICO Score."
Still, it's useful to consider the wallets of people with great credit. In a recent analysis, FICO found that cardholders with scores above 800 — the excellent range is 750 to 850 — had an average of three open cards, according to Dornhelm. If you include both open and closed accounts, they'd had six cards in total.
Since the number of cards you have can affect your credit score in subtle ways, as well as impact how much you earn with different types of credit card rewards, here are three things to keep in mind when deciding whether to get a new card.
Adding a new card can help your credit score
Adding a new card is one way to increase the credit available to you, which allows you to spend more while still maintaining a safe utilization ratio, or the amount you've spent compared to your credit limit. "The lower your ratio of balances to your total credit limits, the better," says Dornhelm.
As a rule, you should try to keep your utilization ratio below 30 percent. You can figure out what it is by adding up your monthly spending — the balances on all your cards — and dividing that number by the sum of your limits. For example, carrying a balance of $200 and having a credit limit of $1,000 would give you a utilization ratio of 20 percent.
If the ratio is too high, getting a new card could lower it since it raises your total credit limit — as long as your spending stays the same.
Closing old accounts can hurt your score
If you do get a new card, don’t rush to cancel your old ones. Over time, closed accounts are no longer included on your credit report, which could reduce the "average age" of your account. Plus, "by closing a credit card account, the consumer is taking some of their available credit off the table," says Dornhelm. That could have a more immediate impact on your credit score.
Open yet inactive accounts, on the other hand, won't harm your score. In fact, they might help it by increasing your available credit.
There are some situations, like when a card you're no longer using has an annual fee, where it might be worth closing the account, not for the sake of your score but to save money. Even in that case, though, there can be loopholes.
"You may be able to ask the credit card issuer to waive the fee or convert the account to a card product that doesn't have an annual fee so you can preserve the account age on your credit reports, which can be better for credit scores," John Ganotis, founder of CreditCardInsider.Com, tells CNBC Make It.
A new card can offer more than just credit
Savvy spenders may use multiple cards to rake in different kinds of rewards. "Someone might want a card that earns more cash back in certain categories, like groceries or gas, and another card that earns a flat cash back rate on all purchases to use for spending in categories where the first card wouldn't earn more," says Ganotis.
So if you're looking for a new card, consider one that offers new perks and rewards to complement the cards you already have. Just keep track of your annual fees to ensure the rewards are actually worth it. And do your research before you apply to make sure it’s not only one you want but one you’re qualified for, since the application process requires a credit inquiry. One of those usually shaves a few points off your score, though nothing drastic.
If you're happy with your current benefits and credit line, there's probably no reason to complicate your situation with a new card.
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I'm an expert in personal finance and credit management with a deep understanding of the factors that influence credit scores. My expertise is grounded in years of research, staying updated with industry trends, and having a comprehensive understanding of credit scoring models, including FICO Scores.
In the article you provided, Ethan Dornhelm, the vice president of FICO Scores and predictive analysis, emphasizes that there is no perfect number of credit cards for achieving an excellent credit score. Instead, the key factors that significantly impact your credit score are how you manage your accounts, such as paying bills on time and keeping balances low relative to available credit limits.
Here are some key concepts discussed in the article:
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Credit Score Components:
- A credit score is a personal rating that determines the interest you pay for a loan and your eligibility for a loan.
- It is calculated based on various factors, including payment history, amount owed, length of credit history, types of credit, and frequency of applying for new credit.
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Number of Credit Cards:
- The sheer number of credit card accounts is less important to the FICO Score than how those accounts are managed.
- Individuals with excellent credit scores (above 800) were found to have an average of three open cards, according to FICO's analysis.
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Utilization Ratio:
- Adding a new credit card can increase the total credit available to you, potentially improving your credit score by lowering your utilization ratio.
- It's recommended to keep your utilization ratio below 30%, calculated by dividing the sum of your card balances by the sum of your credit limits.
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Closing Old Accounts:
- Closing old credit card accounts can harm your credit score by reducing the average age of your accounts and limiting available credit.
- Open yet inactive accounts may not negatively impact your score and might even help by increasing available credit.
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Multiple Cards for Rewards:
- Some individuals use multiple credit cards to maximize rewards, such as earning cash back in specific categories or a flat cash back rate on all purchases.
- Consider researching and choosing new cards that offer complementary perks and rewards to your existing ones.
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Annual Fees:
- Be mindful of annual fees associated with credit cards, and assess whether the rewards justify the cost.
- In some cases, it may be beneficial to negotiate with the credit card issuer to waive the fee or switch to a fee-free card while preserving the account age on your credit reports.
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Credit Inquiry Impact:
- Applying for a new credit card requires a credit inquiry, which may slightly reduce your credit score.
- It's essential to apply for cards you're qualified for and genuinely want to avoid unnecessary impacts on your credit score.
Understanding and managing these concepts can contribute to maintaining a healthy credit profile and maximizing the benefits of credit cards.
