With the increase of digitisation in the financial ecosystem, credit cards have charmed their way into our pockets, offering convenience and goodies. After all, it’s a spending tool that lets you buy first, pay later, and also helps you save through cashbacks, discounts and reward points. The offers available on credit cards vary from company to company and card to card, tailor-made to attract customers.
While some offer high rewards on the purchase of air tickets, others offer fuel surcharge waivers, and still others provide shopping rewards for brand loyalists. Giving in to these attractive offers and easy availability of credit cards at reasonable prices, people often end up holding more than one of these shiny pieces of plastic.
But is it beneficial to hold multiple credit cards? If yes, how many is enough?
How many credit cards is too many?
There is no magic number as to how many credit cards a person should hold. There are benefits you reap from holding multiple cards, but this also comes with greater responsibilities.
Mismanagement of credit cards – whether you hold one or multiple – can increase your debt burden, negatively affect your credit score, and spoil your chances of getting any loans in the future.
Essentially there are three components that weigh heavily (80%) on your credit score: payment history, credit utilisation and length of payment history. So how you manage your credit cards is what counts more than how many cards you hold.
The benefits of holding multiple credit cards
If you are a responsible borrower, following are a few ways it can benefit you.
You could reap more benefits
From free lounge access in airports to rewards on air ticket bookings, credit cards offer a wide array of goodies on several purchases. If you have established a good credit history with a vanilla card, you can add a premium card or two to your kitty to reap some extra benefits on specific purchases.
Go through your bank statements for the last three to six months to spot where you spend most of your money. For example, if you are a frequent traveller, opt for a card that offers rewards on air ticket bookings. However, keep in mind that high reward cards, or premium cards, may have an annual fee that most free, vanilla cards do not.
Lowers credit utilization ratio
Credit utilisation ratio (CUR) refers to the outstanding balance compared to the total credit limit, expressed in percentage. So if your credit limit is Rs. 1 lakh and you have used Rs. 60,000 in a month, your CUR is 60 per cent.
A high CUR shows the borrower to be credit hungry. This will impact his credit score negatively. Therefore, it’s recommended to keep your CUR at not more than 30 per cent.
If your expenditure crosses this mark, you can spread your expense across multiple cards to maintain a lower CUR on each card. So if you are spending Rs. 60,000 in a month, and you have two credit cards with Rs 1 lakh credit limit, split your expenses between the two cards to keep your CUR at 30 per cent. This will help you boost your credit score.
The benefits of a backup
Not all cards are accepted everywhere, especially when you’re travelling abroad. And while travelling, even if you carry cash, you might want to keep a credit card handy. Not just because of the benefits, but also because it can help you through a financial emergency. So, a second card can add value.
What you should watch out for
Despite the potential benefits multiple cards have to offer, you need to be prudent while choosing between relevant and irrelevant ones. Spending beyond your means can increase financial distress. So here are a few tips to manage your cards better.
Understand the purpose of opting for a credit card
Assess the need for selecting a card before you get it. There’s no point in holding two cards that offer similar benefits. Also, you don’t want to add to your list of financial liabilities without reason.
Clear your bills in full before the due date
The more credit cards you have, the greater the number of billing cycles you have to keep track of. It could seem difficult to stay on top of it given there are multiple cards to handle.
However, you can always set a standing instruction with your bank to deduct the bill amount from your salary account to ensure you clear bills before due date. Make sure you pay off the entire outstanding amount, and not just the minimum amount. Interest charges are high on credit cards, around 3-4 per cent a month.
Having access to multiple credit cards can tempt you to spend more. It’s important to stick to a budget. If necessary you could consider setting a spending limit for each of your cards to control overspending.
The writer is CEO, BankBazaar. The article has been published in collaboration with BankBazaar. Opinions expressed are that of the author.