How many credit cards should I have?
When counseling on credit and credit cards I often get similar questions. They range in categories of, “should I get credit cards?” to “how many credit cards should I have?”. The answers are pretty simple and very practical. Let me explain;
Credit cards are a valuable tool for both personal and business expenses. A healthy line of credit can keep your family or business financially afloat for a long time in periods of financial trouble. Either because of life experiences or family members life experiences, many think credit cards are actually evil!. They are not!
Many pundits including Dave Ramsey, say that you should never have a balance or should be working to lower your balance on credit cards every month. In fact, books like Richest Man in Babylon say you should put 20% of your pay towards credit cards or other loans to pay them off. Even in my book “If I Won 25 Million Dollars in the Lottery” I say the same thing! In fact, for the majority this is true, however there are some exceptions and good uses of credit cards that can actually improve your financial life.
First things first! Credit should never be used to buy things you want. Credit should only be used to buy things you need and it should be used wisely. When I say this to many of my clients, I have found that they don’t really understand what a need and a want is, so let me explain; A “need” is something you absolutely can not live without. A “want” is something you CAN live without.
Here is where it gets fuzzy. Let’s say your car is in the shop and the tech says it’s needs a new engine. If your car is really old, well… it’s time for a new car. Of course, you probably don’t have the cash to buy the new car so you have to use credit to buy it. The car is definitely a need, the difference is the type of car is now a want.
I realize this blog is about credit cards, but I wanted to take a this tangent for a moment and remind you of a philosophy I have been teaching for a long time about houses and cars. When purchasing a house, the loan you consider should be no more than 3x your income, with rare exception. This means that if you make $50,000 a year salary, you should not get a loan for more than $150,000. Often mortgage brokers will say you qualify for more, therefore borrowers get more! For those who remember the years of 2008-2011, many people lost homes because they didn’t follow this simple rule.
When buying cars you should never buy a car with a purchase price of more than 25% of your annual income. That means for the same person making $50,000, they should not buy a car for more than $12,500! Think about how many people buy cars with a value of more than their entire annual income! This is a sure way to the poor house.
Getting back to the need and want of a car, discussed earlier. The need would be a car that fits your income parameter. The want would be anything else. Simply put, you need to drive a car to work, you “want “ to impress yourself and your friends with your new BMW.
OK, back to the topic of credit cards;
Televisions, furniture, clothes etc. are all wants and not needs. No you don’t need a new TV! No, you don’t need new clothes, or shoes, or to eat out. No you don’t need a vacation to an island or a cruise to the Caribbean. You want these things and wants should always be paid with cash on hand funds.
Finally, the answer to “How many credit cards should I have?” Believe it or not, as many as you can get!
Now be careful when you read that sentence, because there are only certain types of credit cards you should get. First of all, NEVER get a department store credit card.
If you keep applying for and getting approved for credit cards, you will eventually hit a ceiling of available credit that lenders will feel comfortable giving you. This ceiling depends on credit scores, demographic and other key factors. If you promise yourself to be responsible with credit, you want to be at this ceiling of available credit at all times. I often apply for credit, even though I know that I will probably be turned down because I am at this ceiling. Sometimes, however they surprise me and give me another credit card.
The types of credit cards I apply for are Visa, MasterCard, And Discover only. American Express is OK as well, but they usually charge an annual fee. I am opposed to annual fees, as I believe the credit cards companies make enough off people like me as it is. If your credit score is damaged you may need to pay an annual fee for your credit card and for the most part, I believe you should agree to pay this fee as an effort to rebuild your credit score. Within time, you will have enough cards to cancel the fee based cards.
Now I will say it again, never get a department store credit card!
If the department says they will give you 10% off today if you get their card, do you really think they are doing you a Favor? No they want a piece of your available credit dedicated to them.
Let me explain this is in simple way. If your credit ceiling is $5,000 and $2,,000 is dedicated to department stores, you really only have $3,000 for needs. Department store credit cards are only for wants and you can’t use them for needs!
Imagine if your heater breaks in the middle of the winter, would the repairman take a Macy’s credit card to fix it? I think not.
As a real estate entrepreneur, I also have a Home Depot and a Lowe’s credit card. I use them for when I am renovating houses and could use a short term materials loan at 0% interest. This is just good business.
I want to debunk a myth that I often hear from clients. They often ask “isn’t it easier to get a department store credit card first and then use that to build my credit?” The answer is no to both! It is actually harder to get a department store credit card as the default rate is higher. As for the second part, it actually hurts your ability to get credit you will need when you need it.
Now I’ll bet you questioned, how this all effects your credit score and let me explain. It is true that for every inquiry on your credit report your credit will decrease slightly, however the key is that it is temporary. In fact, if your available credit increases, your credit score will actually increase. That means, if you are approved for the credit, your inquiry decrease will be offset by your credit increase.
More importantly, you need to understand that for the most part, if you are responsible, your on hand available credit is more useful than your credit score. I would rather have the credit available to me when I don’t need it then be turned downed for credit when I do need it. So apply, apply, apply! The most important exception to this rule, is never apply for credit while you are in the mortgage application process. Often times, I have clients loose the ability to buy a house because they applied for credit just at the time they trying to buy a house. Only apply for mass credit cards at least six months before you are considering a mortgage and feel free to apply the day after you close.
I hope this helps you on your way to your financial dreams.
Remember good credit is power and you have a choice on how to use that power to better your life and the life of those around you!
