Dear Opening Credits,
I've had a credit card for five years, and I pay off the balance every month on
time. I believe I have a fairly good credit score. I would like to get another
credit card from the same provider and eventually do a balance transfer. Will
doing this hurt my credit score since I have been a long standing history, or
could my history still be maintained just by applying for a credit card with
the same company? I only have the one credit card currently, but I would like
to eventually have three -- one for emergency, one for Internet purchases and
the other for all other purchases. Is three credit cards too many, and about
how much could it hurt my credit score? -- Amber
Dear Amber,
There's no one answer to how many cards are too many. There
are lots of variables, including how you use the cards and how you make your
payments.
Let's start with your first question: Will another card hurt
your credit score? Yes, but only slightly, and only for a short time period,
assuming you make payments as regularly as you have with your first card. That's because your credit score is determined by several factors.
According to Fair Isaac Corp., the people who created the FICO credit score, your score is based on
several categories:
Payment history -- 35%.
Amounts owed -- 30%.
Length of credit history -- 15%.
New credit activity (including information on recently opened accounts and recent inquiries) -- 10%.
Types of credit used -- 10%.
So let's say your current card has a credit limit of $1,000,
and you get a new card with a limit of $2,000. You've just increased your
overall available credit. Lenders see this as a risk because they know that, if you chose to,
you could run up an extra $2,000 in debt. For this
reason, your credit score could go down slightly. But if you show a responsible
payment pattern with your new card, your credit score will go back up. (The temporary
lowering of your score won't make much difference to you unless you're
planning to ask for even more credit, such as a mortgage or a car loan, in the
next several months.)
Beyond that, a few things in your question made me pause. For one, you say you eventually
want to do a balance transfer, but you also say you pay off the balance on your
current card in full every month. So what is there to transfer? If you do carry
a balance on your current card, and the new card offers a 0 percent interest
rate or another low introductory rate, I can understand the attraction. But if
you don't have a balance on the current card, any balance transfer offers made
by a new card shouldn't matter to you.
Also, you also write about closing your
current card, but you're considering a strategy of eventually having three
cards, each for different kinds of purchases. If you plan to maintain three
cards, it's in your interest to keep the current account open -- unless there's
something about the card you don't like, such as a high interest rate or a high
annual fee, and you've been unable to negotiate better terms. Your length of
credit history contributes to your credit score, and you've had this card for
five years. Closing it now would hurt your credit score and could reduce your length
of credit history from five years to virtually nil, assuming you don't have any other lines of credit, such as a mortgage or car loan.
On to your final question: How many cards is too many? To
this, also, there is no one answer. It depends on how responsibly you use your
credit. If you have three cards and pay them all off in full
and on time -- and you're not paying high annual fees -- three cards are fine.
However, if you don't spend wisely and pay consistently, three credit card accounts might be
too much temptation.
So, to summarize, if you plan to carry out your three-card
strategy, your best bet may be to keep the current card account open and apply
for a second card, then wait six months or longer before applying for a third
card. Each time you get a new card, your credit score will go down a little,
but once you show you're making on-time payments, your score will go back up.
Before you do anything, however, ask yourself whether you
really need additional credit. The more available credit you have, the more you could
potentially run up debt in the future. If you don't need the extra cards, don't
get them.
Karin's money makeover column "Get With The Plan" can be seen every Sunday in "The Star-Ledger" and "The Trenton Times." She also hosts and writes "Money 911," a multimedia series for MSN Money. Before writing became her main focus, Mueller was the executive producer of CNBC's The Money Club, where she led the team that won the network's first ever Cable ACE Award for Business and Consumer Programming. Mueller lives in New Jersey with her husband, three kids, one guinea pig and one leopard gecko. Whatever they don't eat goes into her retirement savings accounts. A comprehensive archive of her writings is available on her Web site, www.KarinPriceMueller.com.
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