How many credit cards should you have, and when should you pay them off?

The ideal number of credit cards varies for each person, but there are key factors that can influence that number, such as one’s financial situation and spending habits.

When considering applying for credit cards, two important factors to evaluate are whether you can consistently pay off the full balance on every card each month and whether the cards match your spending patterns.

“It’s crucial to have a manageable number of credit cards that align with your financial goals and spending habits,” Firdaus Syazwani, founder of Dollar Bureau consultancy, told the Washington Examiner.

What kind of credit card should I get?

Having multiple credit cards and using them responsibly can increase opportunities to earn points and improve one’s credit score, providing more opportunities for rewards.

“Ideally, individuals should maintain about two to three cards to optimize credit utilization and benefits without overwhelming their financial management,” Syazwani said. “This strategy also helps in building a robust credit score by demonstrating responsible credit usage across different types of accounts.”

To maximize credit card benefits over time, the best approach is to select cards that align with one’s long-term financial goals and spending habits, such as earning cash back at grocery stores or accumulating travel rewards.

Starting with the 1986 national launch of the Discover card, cash-back programs have become widely adopted by nearly every major card issuer as a standard feature in rewards programs. For instance, the Discover it Cash Back card offers 5% cash back on everyday purchases at different places each quarter, up to $1,500, and 1% cash back on all other purchases.

Another option is the Blue Cash Everyday card from American Express that offers 3% cash back at supermarkets, gas stations, and online purchases, up to $6,000 per year in each category, and 1% cash back on other purchases.

When it comes to travel rewards, other options include credit cards that reward users with points or miles that can be redeemed for travel expenses, such as the Bank of America Travel Rewards and the Discover it Miles. Airline-specific credit cards include the American Airlines AAdvantage, United Explorer, and Alaska Airlines Visa Signature.

However, these benefits depend on how well the cardholder manages his or her finances. In some cases, the perks offered by these cards may justify any annual fees, as long as they are used effectively.

By understanding card terms like “annual fees” or “foreign transaction fees,” one can avoid unnecessary charges.

For example, annual fees can range from $95 to over $500, and foreign transaction fees are typically around 3%, though credit card companies offer options that waive these or other fees depending on the deals available.

What is a good credit utilization ratio?

While having too many credit cards can lead to overspending or debt, having just one may limit flexibility and result in an insufficient credit utilization ratio.

To maintain a good credit score, it’s recommended to keep your credit utilization rate, or CUR, below 30%. The credit utilization ratio is calculated by adding all credit card balances and dividing that sum by the total credit limits of your cards. So, for example, if you have two credit cards, each with a $2,500 limit, and owe $1,000 on one and $750 on the other, your credit utilization ratio is $1,750 divided by $5,000, or 35%.

Thus, it is important to be cautious and selective when applying for credit cards. Closing credit card accounts can adversely affect one’s credit score.

“For most people, my general rule of thumb is to use one card for regular transactions to optimize rewards, one or two more for unforeseen perks like travel points or store discounts, and an additional card as a backup,” Andrew Gosselin, a certified public accountant and senior editor at the Calculator Site, told the Washington Examiner.

What is a good credit score?

FICO is the most commonly used scoring model by lenders to evaluate applicants’ creditworthiness.

According to FICO’s 2023 survey, only about 1.7% of the scorable U.S. population had a perfect credit score of 850.

In general, a good credit score falls between 670 and 739, while scores from 740 to 799 are considered very good, and those from 800 to 850 are categorized as excellent. Scores below 670 are typically considered fair or poor.

When should you pay your credit card bill?

It is recommended to pay more than the minimum amount to avoid accumulating extra interest and reduce debt faster.

Minimum payments differ among banks, but they typically set a minimum amount, often around $25 to $35, which is the lowest payment required.

If your statement balance is less than the specified minimum, the required payment will equal your total balance.

“It’s always better not to carry a credit card balance because these are some of the highest interest rates debt instruments available,” said Lucia Dunn, professor of economics at Ohio State University.

Timely payments of your credit card bill are crucial since they represent 35% of your credit score.

Failure to pay off all monthly balances on time can lead to more than late fees, high interest rates, and debt. It can also result in a lower credit score due to an increasing utilization rate.

Your credit score reflects your financial management habits. Companies rely on these scores to evaluate your eligibility for mortgages, credit cards, auto loans, and other credit products, as well as to determine the interest rates and credit limits you qualify for.

Additionally, they are used for tenant screening and insurance purposes.

This is because lenders assess your credit score to gauge your reliability as a borrower, aiming to determine how likely you are to responsibly repay debts based on your past records.

According to Gosselin, those who have a balance should devise a strategy to pay it off quickly while continuing to make the minimum payments on their other cards.

“After the first bill is paid off, I counsel clients to pay the minimum amount due on their lower-rate cards and make extra payments on their highest-interest card before moving on to the next highest,” he said. “This ‘debt snowball’ strategy rapidly pays off expensive, high-interest debt while preserving credit standing.”

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Even though making payments by the due date keeps you in good standing with your credit provider, early payments are beneficial because they can help reduce interest charges, increase available credit, and improve your credit score.

Overall, to optimize credit card benefits while using them responsibly, a cardholder should use his or her credit cards whenever possible to ensure earning rewards, avoid overspending, and aim to pay off balances in full each month or as much as possible to minimize debt.