How many Credit Cards should you have?

While the credit card penetration in India is still very low (~1.7% in 2013*), with India’s credit card market being the most underdeveloped in all the major developed and developing countries, Indians have warmed up to the idea of using credit cards. In fact, despite the economic slowdown, spending through credit cards continued to see increase in the past five years. Even credit card companies have been luring customers with plenty of great rewards programs {free air miles, shopping rewards, cash-back, no surcharge on fuel, etc.) and it is certainly hard to resist these offers.

While stuffing your wallet with multiple credit cards may seem like a good idea, it will make you less attractive to lenders, negatively affecting your credit score, even if you always pay on time. In such a scenario you would obviously think – “How many credit cards should I own?”.

Less is more

While there are no restrictions from the government or the credit card companies on how many credit cards you can own, one or two is adequate {and recommended}. Choose a card that offers excellent customer service, low-interest rates, rewards and freebies. If one card does not offer all of these, then you can opt for two cards – one would be a rewards card that you would use for your everyday purchases and would pay in full and the other could be a low-interest card in case you run into an emergency and need to borrow {we strictly do not recommend using credit card as a tool to borrow money}. The latter should only be used for emergencies or if you exhaust your limit first and need to make a purchase against cash you own.

Having more cards means more responsibility, which means keeping track of getting the statements on time, meeting the dues dates, taking care of the interest-free period, and ensuring the maximum credit limit is not breached. Obviously, there are benefits too, but if you lose track the repercussions can be huge.

Moreover, if you use one card more often and maintain a good payment record your credit card issuer is likely to increase your credit limit. So instead of maintaining multiple cards, you can access a higher credit limit through your existing card. Less gives you more.

Use it for a better score

Your credit card history and usage are major factors in deciding your credit score (Cibil* Score). Your credit utilisation indicates how much of your available credit you use on a monthly basis, so for example, if you have a balance of Rs 20,000 on one card and made total purchases of Rs 30,000 using another credit card, and each card has Rs 50,000 limit, your credit utilization rate would be 50%. CIBIL says that “while increased spending on your credit card will not necessarily affect your score in a negative manner, an increase in the current balance of your credit card indicates an increased repayment burden and may negatively affect your score,”.

So a high balance on your cards puts a red flag on your ability to borrow in the eyes of lenders, as they believe that if you are coming with a higher balance, the probability of you missing on payments or, worse, defaulting increases. Therefore, as a thumb rule, your credit utilisation should not be more than 30%.

The more credit cards you have, the more the temptation to use them. As your credit card balances increase, so does your credit utilization. It, therefore, makes sense to minimize the number of credit cards you have and the balance you carry on those cards (<30% credit utilisation) in order to keep down your credit utilisation. Also, if you have too many cards you become a risky prospect for lenders especially if you have access to more credit than you have the ability to repay.

I have more than two cards, what should I do?

You don’t need to worry if you have already taken up more than two credit cards; you can cancel your most recent cards. You must absolutely not cancel your old card as it gives you credibility in the eyes of lenders. Through your old card, they can see that you have the experience managing credit hence improving your Cibil score.  Moreover, you can also have access to a higher credit limit through your old card.

Summing up

So the answer to How many credit cards should I own is while one is the ideal number {if you manage your credit utilisation well} you can have up to two credit cards.

Make sure you pay all your credit card dues on time, maintaining zero balances, to build your Cibil score.

*CIBIL stands for – Credit Information Bureau India Ltd