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Debunking Credit Card Myths: Does Having Many Cards Hurt Your Credit Score?

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We talk about travel rewards credit cards quite a bit here at TPG. Applying for and utilizing these cards strategically can unlock incredible travel experiences like premium class flights or luxurious hotel rooms. However, there are a number of misconceptions out there when it comes to credit cards, so today I’ll kick off a new series of posts that debunk these myths and allow you to begin planning for your next vacation.

Myth #1: Having lots of credit cards will hurt your credit score.

As I write this post, I currently have 15 open travel rewards credit cards. This strikes many of my friends and family members as off-the-wall, and the most common comment I get is, “Aren’t you worried about what all of those cards will do to your credit score?”

In reality, I’m not worried about what they do to my score. Instead I am enjoying the boost they have on my score.

For this series, it’s essential to understand the different factors that contribute to your FICO score, the one most frequently used to determine your creditworthiness for any new line of credit:

  • Payment history
  • Amounts owed
  • Length of credit history
  • New credit
  • Types of credit used

However, not all factors are created equal, and these five are weighted based on how important they are to your score:

According to myfico.com, these next two mistakes will impact almost two-thirds of your credit score!

When it comes to opening a large number of credit cards, it’s the two most important factors that come into play: payment history and amounts owed.

Payment History

The single biggest factor in your FICO score is your payment history, which covers any type of credit or installment account linked to your name. While one or two late payments won’t completely ruin your score, it can have a negative impact.

So how does having multiple credit card accounts help this factor? It all comes down to painting a positive picture of your overall credit, and MyFico.com even points out that having multiple accounts with no late payment is a positive:

“A good track record on most of your credit accounts will increase your FICO Scores.”

For example, let’s say you have a single credit card and were late on two or three payments several years ago. Even though you’ve made up ground by paying on time ever since, you’re still 0 for 1 when it comes to accounts showing a late payment. If you add new cards to your wallet and aren’t late on any payments, you now have accounts with a positive track record. This may not move your score from 500 to 700, but in the long run, it’s an undoubtedly positive pattern.

Amounts Owed

My credit score remains high, in large part due to my low credit utilization rate.
My credit score remains high, in large part due to my low credit utilization rate.

The second most important factor in your FICO score is the amounts owed, commonly referred to as your credit utilization rate. This looks at how much of your credit you are actually using and is typically expressed as a percentage. Here’s the calculation:

Total balance on your account(s) / Total limit of accounts = Utilization

Keeping this number low shows issuers that you can effectively manage your credit lines and aren’t at risk of over-extending yourself.

Let’s say that you typically spend about $2,000 per month on a credit card, and you currently have a single card with a $10,000 limit. You thus have a utilization rate of 20% ($2,000 / $10,000). However, if you apply for another card and get another $10,000 of credit, you are now spreading that $2,000 of spending across double the available credit. Your utilization drops to 10%.

Let’s extend this math out to even more cards with that same $10,000 credit limit and same $2,000 in monthly spending:

  • Three cards: $2,000 / $30,000 = 6.67%
  • Four cards: $2,000 / $40,000 = 5%
  • Five cards: $2,000 / $50,000 = 4%

My 15 cards have a huge amount of available credit on them, but my utilization rate regularly hovers between 3% and 4%. I don’t spend more on the cards just because I have them. What I am spending is just spread out across a broader credit line, helping my utilization rate and thus improving my credit score.

All that being said, it’s important to note that there are situations where having too many credit cards can impact your credit score. Spending beyond your means (and not paying your balance in full) is a quick way to wreck your score, and adding untrustworthy authorized users can also have a negative impact. Remember too that you should do everything possible to avoid missing payments.

For some additional tips on how to successfully manage your credit cards, be sure to check out my post on Ten Commandments for Travel Rewards Credit Cards.

Bottom Line

Credit Cards stack featured shutterstock 115341850
Opening many credit cards isn’t a guarantee of a high credit score, but it can certainly help! Image courtesy of Shutterstock.

There are many myths about credit cards out there, and a common one relates to the perceived negative impact that multiple accounts can have on your credit score. In reality, the opposite is true, as almost two-thirds (65%) of your FICO score is determined by factors that can actually be enhanced with additional accounts. As always, be sure that you aren’t over-extending yourself, as this myth can easily come true given the right (or wrong) environment.

For additional information on your credit score and credit cards, check out the following posts:

What are your thoughts on having a large number of credit cards?

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