Your credit score – that magical number that can seem so insignificant and yet has the ability to impact every financial decision you’ll ever make. Credit scores can be a frustrating mystery to figure out, and it can be hard to know if your personal financial habits are helping or harming your credit score. How many credit cards do you need to have in order to boost your credit score, and at what point do they become a hindrance? Here are some tips to help you navigate your way through the credit score maze.
How is My Credit Score Calculated?
When financial institutions and companies check your credit score, they are wanting to know how reliable you will be in repaying the debt they are considering extending to you. Your credit score is calculated by taking into consideration your payment history, your debt to credit ratio, length of credit history, new credit, and type of credit used. Visit investopedia for more information on what specifically goes into your credit score calculation.
How Do Credit Cards Affect My Credit Score?
Credit cards can both help and hurt your credit score. Several of the factors listed above relate specifically to credit card usage.
- Payment History – If you forget to make payments or you make payments late, this can negatively affect your credit score.
- Debt to Credit Ratio – You help your credit score when you have a low debt to credit ratio. If you have several credit card accounts, you are responsible with your monthly payments, and you keep your balances low, having credit cards could help your credit score. For example, you have the ability to spend $30,000 on your combined credit cards, but you choose to maintain your balances at a level of $4,000. This shows lenders that you know how to handle your money, and you know your own limits. Just because you were given the ability to spend more doesn’t mean you will. On the other hand, if you have a lot of cards, and they are all maxed out, this shows lenders that you are spending outside of your means and suggests that you don’t know your own financial limits, making you more of a lending risk. Improve your score by maintaining low balances on your cards to keep your debt to credit ratio low.
- Length of Credit History – Your length of credit history also plays a part in your credit score. Try to keep your longest accounts open to show lenders that you’ve been trusted with debt for a longer period of time.
How Many Credit Cards Should I have?
The answer is different for everyone. It’s not the specific number of cards that matters, but how you use them. How many credit cards to have depends on how you handle your money. Keeping your credit card balances low and making payments regularly is the best way to use credit cards to your advantage and improve your credit score. Click here for more tips on how to manage your credit cards. Keep in mind that credit card accounts must have some regular activity or they will be considered inactive accounts. Showing you are responsible with money does not mean you can get ten credit cards and hide them away in a drawer and get perfect credit a few months later. Lenders want to see that you can use credit a little when necessary, stay within your financial means, and pay off your debt as agreed. Lenders want to see that you’ll be responsible with the money they’re loaning you. If you decide you have too many credit cards, consider closing shorter accounts before closing long-standing accounts. Also, having too many credit cards that you’re not using could mean you’re wasting money on annual fees, so keep that in mind as you’re considering your credit card accounts. Click here to see if you have too many credit cards.
There is no magic way to get a perfect credit score. Great credit scores take time to establish. Take on only as much debt as you personally can handle, always pay every payment on time, and over time, your credit score will improve.