Why Three is The Ideal Number of Credit Cards You Should Hold?

September 4, 2021 Mutual Fund

In order to improve our lifestyle, many of us are habituated to live beyond our means, by borrowing or on credit. We even keep on adding credit cards so that we can swipe them wherever possible. While doing this, many of us are unclear about the number of credit cards we should hold.

Many banks and financial institutions constantly roll-out irresistible benefits and offers on credit cards. Many people end up holding multiple credit cards they might not even use. Some people do not even hold a single credit card because they feel a credit card will imbalance their financial discipline. So, how many credit cards should you hold? Well, the answer is not the same for everyone.

Read on to know how can you choose the correct number of credit cards for yourself:

Here are the benefits of having multiple Credit Cards (CCs):

1. Higher Credit Limit:

With every new credit card, your credit limit increases automatically. You often use your credit card in case of an emergency and then realise that you do not have sufficient credit because you have already utilised it. Holding multiple credit cards can avoid such unpleasant situations. With an increased credit limit through multiple credit cards, you get the opportunity to invest more of your emergency fund that’s lying idle in the savings account into debt or liquid schemes. This might give you higher returns than the savings bank account interest rate.

Moreover, the card could have technical issues, or the card may get lost, damaged or expired. .

2. Good Credit Score:

Multiple credit cards help you maintain a good Credit Utilisation Ratio (CUR), which results in a good credit score. Many financial experts recommend using a maximum of 30% of your available credit limit to maintain a good Credit Utilisation Ratio. You can easily achieve this if you have multiple credit cards to fairly distribute expenses.

For example, suppose you have a credit card with Rs 1,00,000 limit, and you recently made purchases worth Rs 80,000 through it. You have utilised 80% of your available limit, which might affect your credit score until you pay off a significant part of it. The trick is to use less than 30% of your available credit limit on each card.

However, if you had had credit cards with a combining limit of Rs 3,00,000, you would have been able to spread your purchases across all three cards, and it wouldn’t affect your credit score, as you would use.

3. Maximum Rewards:

Not all credit cards offer the same rewards. Compare different credit cards based on their discounts and cash-back offers at various online and offline platforms. For example, some credit cards offer 5%-10% cash-back on booking movie tickets online; while other credit cards offer 5% cash-back on grocery shopping. You can choose different cards based on the features and offers you prefer, to get the maximum benefits out of it.

For maximum reward points from specific categories, you can use co-branded credit cards. For example, if you are a frequent flyer, you can get an Air Miles credit card that offers maximum reward points in the form of miles, which can be redeemed to buy domestic or international flight tickets. So, you can choose to get co-branded cards for extra benefits in addition to your primary credit card.

There are few risks as well:

1. Impulsive spending:

With ease to shop online and credit cards provide irresistible offers, one can end up spending impulsively. If you are not prudent at financial discipline, you might create a huge debt with multiple credit cards that may become difficult to pay later. Moreover, frequently applying for credit cards can adversely affect your credit score as well.

2. Difficulty in managing Cards:

If you are not prudent at managing your finances in a disciplined manner, you might forget your credit card payment due dates. Not paying the entire credit card bills on time attracts high late payment charges and penalties, which can also harm your credit score.

So, how many credit cards should you hold?

We have discussed the benefits and risks involved in having multiple credit cards. If you think you do not have financial discipline and might not be able to manage multiple cards well, it would be better to hold just two credit cards.

One of them will be your primary card, which might offer fewer rewards but are consistent, irrespective of the category. For example, instead of opting for a card that offers 5% cash-back on groceries, your primary credit card should be the one that offers 1%-2% cash-back or reward points on all purchases.

You can choose your second card based on your lifestyle. For example, if you frequently travel by car, you can opt for a card that offers a fixed percentage of cash-back on fuel purchase and has a fuel surcharge waiver.

On the other hand, if you are organised, prudent at financial discipline, and want to get most from your credit card offers, three is an ideal number of credit cards you should hold. It gives you a higher credit limit, alternative cards to use in case of an emergency or a technical issue, and also increases your credit score, if you maintain the credit utilisation ratio. Moreover, three is not an enormous number that can become difficult to manage. Having three cards can help you get the maximum benefit of rewards if you manage them wisely.

Again, choose your co-branded credit cards based on your lifestyle and requirements. For example, if your work requires frequent air travel, you should opt for a co-branded Air Miles credit card that offers reward miles, which you can use for your next flight booking. Now, as a frequent traveller, you might also be staying at hotels quite often, but opting for a credit card that offers the best deals on hotels and restaurants might not be the best option. That’s because most Air Mile credit cards provide great reward points and cash-backs on hotels and restaurants.

Therefore, you need to carefully check and compare the offers to avoid getting credit cards that offer similar discounts. Instead, you can opt for a credit card that matches your other requirements, which the existing cards cannot fulfil.

Some people use 5-6 credit cards; but, honestly, if you use a couple of co-branded cards that ensure the best deals on your major requirements and a primary card that gives you good deals almost everywhere else, you may not need so many credit cards. Managing more than three cards can be a challenging task. Plus, if you have a large credit available, lenders may consider you as a high-risk profile individual. Hence, there is a possibility that you may use the entire credit limit in future and get into a debt trap, which may be difficult to clear.

To Conclude:

After considering all the pros and cons, we recommend holding three credit cards, as it perfectly balances the benefits of single and multiple credit cards. However, you should not apply for all three cards at once. Start with your primary card and then get the other two cards gradually, depending on your requirements. If you have more than three cards and facing difficulties to manage, we recommend you to cancel the extra credit cards, which you are not using.

Remember that opting or closing multiple cards at once is not recommended, as it can have a negative impact on your credit score. Managing your cards well is a key to a good credit score. Remember the payment due date when you have three credit cards to manage, but as a safety precaution, you should opt for an ‘Auto-Pay’ facility that most banks offer. It lets your due amount pay automatically on the due date from your registered bank account. Also, pick the correct card for each purchase to earn higher reward points. These simple tips and tricks can help you become financially disciplined and benefit the most from your credit cards.

This article first appeared on PersonalFN here