Hey everyone and thank you for coming to read my first post here on Stumble Forward. Today, I’d like to talk a bit about credit cards. These days, credit cards have become the cornerstone of things we have in common as consumers when it comes to finances. The truth is, the vast majority of us who qualify for these special rectangular pieces of plastic have one or two of them at least!
That being said, there are a few questions that have come up as a result of the popularity of credit cards. Questions like, “Is it important to have a credit card and why?”, “How many credit cards should you have?” and “How much credit card debt is OK to have without harming your credit scores?” are often the topic of conversation in my emails and social media. That being said, here are the best answers that I can give when it comes to these questions…
Is It Important To Have A Credit Card? Why Or Why Not?
Having a credit card has become more and more important as lenders and credit reporting agencies fine tune their algorithms that tell them who is most likely to pay back debts. These days, how you handle your revolving credit is a huge factor that comes into play when determining your credit score. Therefore, if you don’t have a credit card that is actively used, you may find it hard to improve your credit score enough to get a good interest rate on important loans like mortgages and auto loans.
Aside from the credit score aspect of having credit cards, it’s also important to remember that these cards have become a primary way to pay in the United States. These safe alternatives to cash are accepted almost anywhere you go and help you to manage your funds. The simple fact is, if you are trying to obtain financial stability having a credit card can really help you.
Finally, there are tons of recreational reasons you might want a credit card. For instance, you will find it hard to reserve a hotel room or rent a car without a credit card. Aside from the benefits they provide to you, they also provide insurance for those who’s services require the use of their property. They are used to gauge the credibility of consumers as well as recover any losses as a result of damage to the property that consumers rent.
How Many Credit Cards Should You Have?
There are two ways to look at this question and I hope to address them both for anyone who is looking for one or the other. That being said, the first way to address this question is from a credit score perspective.
Like not having a credit card at all, having too many credit cards can have a negative impact on your credit score. I’ve seen this time and time again with consumers who email me something like…”I’m doing everything right, I pay all my credit card bills on time and, that’s a feat with 8 accounts.
Why is my credit score going down?”. In this case, it is because the consumers have too many credit cards or credit card debts. When looking at it from a credit score standpoint, it is never good to have more than 3 credit cards.
Looking at it from another direction brings a completely different answer. Because thinking of financial stability when making decisions like this often leads to good credit scores, I often tell my clients not to think about their scores but, instead to think about how the decision will benefit their financial stability.
That said, the question, “How many credit cards should you have?” should be rephrased to “How many credit cards are necessary for a financially stable lifestyle?”. That being said, the answer is 2. One credit card that you plan to use on a daily basis and pay off at the end of the month. The second credit card would be the account with the lowest interest rate and would be used as your large purchase or emergency fund. This is the card you will carry a balance on and aggressively work to pay off over time.
How Much Credit Card Debt Is OK To Have Without Harming Your Credit Scores?
Your credit score is the most important 3 digit number you will ever come across. I say it time and time again. Now, when it comes to credit card debt, it’s important to remember that over-indulgence is never a good thing.
Not only will overuse of credit cards lead to financial hardships or even bankruptcy, as it happens, your credit score will consistently decrease. After all, one of the factors used in the calculation of your credit score is your debt to available credit ratio.
Generally, financially stable consumers that are likely to pay their debts back have a debt to credit ratio below 50%. Once it goes over 50%, consumers have a high likelihood of financial hardship and lenders know that means they will not be paid back in a timely manor. That being said, as long as you keep your balance below 50% of your credit line, you should be fine.
About The Author – Joshua Rodriguez