How many credit cards should you have and answers to your other pressing questions Money Talks News Friday, April 25, 2014
Judging from our inbox, there seems to be a lot of credit confusion out there.
Whether you want to know how many credit cards to carry or when Junior should get his own card, you’ve got questions. Lucky for you, we’ve got answers!
How many credit cards should I have?
Ah, this would be the $64,000 question. Some well-known financial gurus would tell you the answer is zero. Meanwhile, other card experts say they have up to 20 active accounts open at any given time.
However, Adam Levin, founder of our partner site Credit.com, suggests a more middle-of-the-road approach. He says you should consider having two cards — a rewards credit card for everyday use and a low-interest card to be used for emergencies.
Why not have just one good all-purpose card? Mainly because you’ll want to earn rewards from your purchases, but airline, gas and cash-back cards tend to have higher interest rates. That’s fine as long as you’re paying off your balance each month.
But when the water heater says “No more” and your savings account says “Yeah, right,” you’ll want a low-interest credit card waiting in the wings. You don’t want to carry a balance on a high-interest rewards card.
Should I be carrying a balance?
Unless you’re self-financing a purchase or dealing with an emergency situation, paying credit card interest is just plain dumb .
Now, some people believe you need to carry a balance for your credit score to benefit, but that’s not really the case. You can read this article to learn more about why no balance is needed to boost your score.
What exactly is my credit score and how is it calculated?
Speaking of credit scores, some people are a little hazy on what that is and how it’s calculated.
While there are several different companies creating credit scores, the one most likely to influence your access to credit and interest rates is your FICO score.
Your main FICO score runs from 300 to 850, and companies use it to decide how well you manage your credit and how likely you are to pay them back if they give you money. The higher the score, the more trustworthy you appear to creditors.
The score is created and weighted with the following information:
Payment history – 35 percent. Amounts owed – 30 percent. Length of credit history – 15 percent. New credit — 10 percent. Types of credit used – 10 percent.
FICO doesn’t say what constitutes a good or bad credit score. However, typically, if your score is below 600, you’re probably viewed as risky business. A score above 800 will generally get you the best interest rates and terms.
For more information, read our article on credit score fact and fiction.
How often should I check my credit score?
Levin suggests you take a look at your credit score as often as possible.
Some credit card companies and banks are now providing credit scores free as part of their customers’ monthly statement. A bill has also been introduced in Congress to give everyone free access to their score.
Until that happens, if your bank or card isn’t providing scores for free, you may have to wait until either a creditor denies you or you pay FICO for the information.
Once you get a look at that magic number, you may want to take this advice on how to raise your score quickly.
I’m ready to ditch my debt. Do I pay off the card with higher interest or a higher balance first?
The answer to this question also rests largely on which financial guru you ask.
Some argue you should start with the smallest balance. Quickly paying off that account can give you the momentum you need to keep on your debt diet.
However, if you look at it from a purely financial standpoint, you’ll want to start with the highest-interest card. Levin says paying off the high-interest card first saves the most money.
co-sign a card for a friend or family member?
Co-signing for a card or loan puts you on the hook for the balance in the event your friend or family member stops paying. Or they could be paying late – which you may never know – and that could also negatively affect your credit score.
But I know that wouldn’t happen. They are really good people!
I’m sure they are, but sometimes even good people make poor money decisions. Or life takes a turn you didn’t expect. Rhonda knows all about that.
Bottom line: You shouldn’t co-sign unless you’re ready and able to assume the debt as your own in the event your co-signer, for whatever reason, can’t pay.
When should my child get her or his first credit card?
Probably not until they have a real job and some emergency savings.
They need to have their own money before they start using someone else’s money, so a steady job is a must. A work-study gig in the campus cafeteria for three months doesn’t cut it either.
As for the savings, that’s to ensure they don’t get sucked into using their credit card for every minor crisis or shopping whim. Students need to get into the habit of saving before they perfect the habit of spending.
All that is fine and good, but the reality is you may not have much say in when your child gets his or her first credit card. While the CARD Act of 2009 made it more difficult for those younger than 21 to get a credit card, plenty of young adults are still finding ways to get their own plastic.
The best you can do is to educate your children on smart credit habits, hope it sinks in and refuse to co-sign any applications for them.
Should I close the account on a credit card I no longer use?
It’s really up to you, but if you’re concerned about your credit score, Stacy Johnson suggests it may be best to keep it open. If you don’t like his advice, you may be interested to hear what FICO says on the subject: “We never recommend closing a credit card for the sole purpose of raising your FICO score.”
Is it ever smart to pay an annual fee?
For most people, the answer is no, although you may need to do a little math to figure out what’s best for you.
You see, there are plenty of great credit cards that are fee-free. That means typical cardholders probably shouldn’t be paying for the privilege of charging their purchases.
However, if you’re a heavy user, it may make sense to splurge on a card with a fee. A few years back, I interviewed a frequent flier who told me he happily paid somewhere in the ballpark of $400 annually for his premier airline card. It was money well spent because it included a sky club membership valued at somewhere around $700 per year. He would have bought that membership anyway, which meant he was already saving money before he spent a single cent on the card.
In your case, you need to look at the rewards you earn versus the annual fee and see if the card pays off. Be realistic, though. Don’t calculate in the value of perks you’ll never use when deciding if the annual fee is worthwhile.
I made mistakes and destroyed my good credit. Should I get a credit card to rebuild it?
If you’ve ruined your credit, you need to do a little soul searching before filling out a credit card application. Yes, a card may help you improve your credit if you use it responsibly. At the same time, it could just dig you a deeper hole if you seem to lose all spending self-discipline when you have plastic in your pocket.
For those not sure if they’re able to use credit wisely, a secured credit card is one way to test the waters. Or there are other ways to rebuild credit without a card.
Did we miss anything? Leave a comment below or send an email with your credit questions and you may see them featured in a future article.