Credit cards can be a great convenience but if you carry a balance, they can potentially cost you thousands of dollars in interest expenses and fees. Opening or closing credit card accounts can have a meaningful effect on your credit score, so it’s import to choose your steps wisely. This leads consumers to wonder how many credit cards is an optimal number.

Spoiler alert: There isn’t a fixed number of credit cards you should have. There are, however, cases where you might have too few or too many.

Transactors versus revolvers

People utilize credit cards in different ways and for different reasons. For some, credit cards are simply a convenient alternative to cash or debit cards. While credit cards and debit cards may seem like functional equivalents — both can be used for purchases online or in brick and mortar locations — some prefer to use a credit card as an alternative to cash because using a credit card doesn’t impact their bank account and reduces the risk of their debit card number falling into the wrong hands, possibly putting the mortgage money, rent money, or other funds at risk.

People who make purchases with credit cards but don’t carry a balance are called “transactors” by the credit card industry; they make one or more transactions and pay off the balance in full when they receive their statement. Transactors save on interest cost — which is the highest expense related to credit cards — but may still pay an annual fee for the convenience of using the card. About a quarter of credit cards charge an annual fee.

Forty-five percent of U.S. households don’t ever carry a credit card balance according to the Federal Reserve’s Report on the Economic Well-Being of U.S. Households, a survey conducted annually to better understand the current state of U.S. households.¹

The remainder of households that have credit cards carry a balance all or most of the time — or at least some of the time, according to the same Federal Reserve survey. This group is called “revolvers” and households that carry a balance pay almost all of the interest charges collected by credit card companies as well as more than seventy percent of the collected credit card fees. Without revolvers, credit card companies would have very little revenue from issuing credit cards.

Too many credit cards versus too few

While there isn’t a fixed number of cards you should have, there are cases to be made for having too few or too many. Having at least one credit card is generally regarded as a healthy part of financial preparedness. Not only will having at least one card help you build a sound credit history, having access to credit in an emergency can create an important stopgap if the financial emergency depletes your savings and still has associated expenses.

For most households, the number of credit cards they should have is at least one. If there’s a concern about the temptation to use the credit card for non-emergencies, some people hide their credit cards in their homes instead of carrying them in their wallets, creating an extra step if they are tempted to use the card.

The numbers vary depending on the report you read, but most reports indicate that, on average, we have just over 2.5 credit cards per credit card holder. There may be some good reasons for having more than one credit card, like a card that offers airline travel rewards but which may not be the best choice if you had to use it in an emergency or another situation that forced you to carry a balance for a longer duration. In this case, having a lower interest card or a card with a higher credit limit may provide additional flexibility. Ultimately, it’s best to build an emergency fund but a credit card can help navigate life’s cash crunches if your emergency fund is still a work in progress.

Having more credit cards is often a greater exposure risk than it is a risk to your credit score. Having several credit cards can create financial exposure in a number of ways. It seems like every week we see headlines about a major retailer or service provider that has been breached. Having more credit cards floating around in the ether can be likened to purchasing more lottery tickets before the big drawing — except that if you win this lottery, you lose. Your chances of having your credit card number compromised can increase if you actively use all your cards.

Even with new security measures such as chip cards, exposure risk abounds. In a recent report from CreditCards.com citing data from Gemini Advisory, it was found that six out of ten stolen credit card numbers for sale on the dark web came from card-present transactions, with most of the stolen card numbers being chip cards. While chip cards prevent easy duplication, these card numbers can still be used for online purchases. If you’ve ever been a victim of credit card fraud, you know what a disruption it can cause, often leading to missed work, late bills, and giving new meaning to the term “cash crunch”. Having fewer credit cards numbers that could potentially be out in the wild is a safer strategy.

Perhaps the biggest risk of having several credit cards is that there are more moving parts. Each card is a bill that could be missed; less is often more — and in this case, maybe easier to manage as well. Another potential concern is that all of the cards might be pressed into service over time. This doesn’t necessarily create more debt — but it can. In reality, a single card with a $5,000 balance isn’t any more debt than five cards each with $1,000 balances. Paying down one card is much more manageable, however.

The benefit of older credit accounts

One of the larger factors in your credit score is the average age of your credit accounts. If you got a credit card when you were twenty and still have it when you are thirty, that’s great for your credit score. Experts estimate that the age of your credit accounts makes up about fifteen percent of your credit score. The formula you want to look at is the total number of months for all accounts on your credit report divided by the number of accounts. With this formula, you can quickly understand the importance of keeping older credit cards and how opening a new account can be damaging — at least from the measurement of the average account age.

Don’t be so quick to cancel an old credit card even if the interest rate isn’t as attractive as some of your newer cards or offers. If you don’t plan to use the old card, it’s often better for your credit score to just put the card away someplace safe.

Generally, when discussing credit scores, most people are referring to your FICO score, the credit score used by most lenders. The three major credit bureaus, however, utilize a VantageScore, which places a higher weight on both the age of your credit and on your credit utilization than how your FICO score weighs these factors. Whether safeguarding your FICO score or the credit scores assigned by the three major credit bureaus, having a longer credit history can benefit your credit score.

The benefit of new credit accounts

After discussing the effect of new credit cards on your credit score, it may seem counterintuitive to propose that new credit accounts can be beneficial. Another important measurement in credit scores is your debt utilization. Credit issuers and rating bureaus look at your total level of debt and credit utilization, weighing these combined factors which can impact your credit score by an estimated thirty percent.

To use some simple math, if you had only one card with a $1,000 credit limit and you made a $500 purchase, your credit utilization is fifty percent. Ideally, you’ll want to stay below this thirty percent to maximize your credit score in regard to credit utilization.

If you then open a second credit card account with $1,000 credit limit, and you don’t carry a balance on the new card or you transfer the balance from the existing card, your credit utilization falls to twenty-five percent because you only have a balance of $500 compared to $2,000 in available credit.

Opening new accounts solely to manage credit utilization isn’t recommended, however. Opening a new credit account — or even just applying for new credit — results of a hard pull on your credit report, what can lower your credit score temporarily.

The drawbacks of new credit accounts

While opening new credit accounts can lower your credit utilization, it’s rare that the new accounts don’t get used, which can lead to increasing credit card debt and additional interest expenses. Additionally, opening new credit accounts can cause your credit score to take a hit, particularly if you apply for several new credit accounts in a short amount of time — even if these credit accounts are different types of credit, such as credit cards and an auto loan or lease. Credit inquiries are estimated to influence your credit report by as much as ten percent.

Having fewer credit cards makes managing payments easier and reduces the risk of late payments simply because there are fewer bills to track each month. Your credit payment history can affect your credit score by an estimated thirty-five percent, making your payment history the most important aspect of your credit score to safeguard.

Closed accounts stay on your credit history

Simply closing an account for a credit card you no longer use or no longer wish to use doesn’t remove that credit card from your credit report. Your credit report reflects the history of all your credit accounts, including open and closed accounts. Closing the account with your creditor results in your credit report being updated to indicate that the account was closed.

Most negative information on your credit report can affect your credit score for a maximum of seven years, after which most negative items are removed from your credit report. Negative items, like late payments, are most harmful when they are new. Generally, if you made a late payment five years ago, the effect is smaller than a late payment that was added to your credit report five days ago.

In most cases, negative credit items that are older than seven years will come off automatically. If a particular credit bureau still has a negative item listed after seven years, you can file a dispute to remove the account from your credit report with that bureau. It’s unlikely that negative items will be removed from your credit report prior to seven years unless it can be shown but the negative item is an error.

Closed accounts without any negative information, such as late payments or outstanding balances, can stay on your credit report for up to ten years. These old accounts without negative information don’t hurt your credit score. In fact, if old closed accounts have a positive credit history, they may be helping your overall credit score, although the impact will be smaller than current factors, like recent payment history, credit utilization, and applying for new credit.

Final thoughts

There isn’t an exact answer to how many credit cards you need or should have. There are, however, sound reasons to have at least one credit card and reasons why having several credit cards can create risk. If you’re just starting out on your credit journey and your first credit card was a department store card or another specialty card, it can make sense to get a major credit card once you’ve established good credit.

If you already have multiple credit cards, consider keeping the oldest cards if you choose to simplify and reduce the number of credit cards you have. If the interest rate is competitive on your older cards and there is no annual fee, keeping your older cards for emergencies can help your credit score, ultimately saving your money not just on interest expenses but also on common expenses, like insurance.

Endnotes

1. https://www.federalreserve.gov/publications/files/2017-report-economic-well-being-us-households-201805.pdf