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10/19/07

How Many Credit Cards is Too Many?

I am amazed when I read literature from people that advocate that credit cards are evil and that a person should never own one. The reason that these people give is that the credit card owner will incur a lot of debt quickly and will be trapped by these devices of evil. These people automatically assume that you are going to irresponsibly use credit. That is an unfair assumption!

In order to support there arguments, these credit bashing people back up their arguments by quoting statistics. Mark Twain once said, “There are three kinds of lies: lies, damned lies, and statistics!” The point Twain is trying to make is that people become slaves to statistics. For example, a statistic exists that states that 50% of first marriages end in divorce. Does this mean that you should not get married because it is doomed to failure? Of course not! The same holds true with credit cards. Just because there are people that struggle with credit card debt does not mean that you are going to struggle with it. Additionally, in this day and age, credit is a vital asset. Unless you plan on paying cash for your home and car(s), you are going to have to have credit in order to be approved for a loan.

If you are a responsible credit card user, the number of cards you have is irrelevant. However, for purposes of providing a finite number to the question presented above, I think 3 is a good number, but 4 at the most. My reasons are simple:

First, there are four major credit cards: Visa, MasterCard, American Express, and Discover. I am not a big fan of the Discover card, therefore, having one card from each Visa, MasterCard, and American Express would give you a total of 3 cards. However, if you like Discover, then that would be your fourth card.

Second, when applying for a home loan, a bank looks to how many credit accounts you have open for a specific term. Most banks require that you have at least three credit accounts open and current that are at least 3 years old. Therefore, owning only 1 credit card will not cut the mustard.

Third, different cards give different benefits. Therefore, if your Visa has a low interest rate and you are making a larger purchase that will take a couple of months to pay off, use the Visa so you do not get nailed by the interest rate (of course all of your cards should have a low rate to begin with). However, if your American Express offers rewards points for airlines miles or other merchandise and your purchase is relatively small, use the American Express. The point is, tailor your credit card use to your purchases and the benefit you seek.

Last, most wallets only have room for four credits cards, therefore, you should only have four credit cards! I am just kidding about this last reason.

When I stated above that the number of cards you own is irrelevant if you are responsible, I meant that it is irrelevant in regard to debt management problems. There is a one other reason why you should not have more than 3 to 4 cards. As you maintain these cards, your credit limit will increase. Getting more cards adds to your total credit limit. If you have ten cards and a total credit limit of $100,000 (ten cards at $10,000 each), but you only make $50,000 a year, a home lender may view this as a risk. Think about it; you could borrow twice your annual salary! A home lender will be nervous that if you utilize that credit limit and ended up owing more than you can afford, you will default on the home loan. Additionally, depending on how and when you opened these accounts, you credit score could be negatively affected.

Here is the bottom line, use credit responsibly.

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