How many credit cards do you need? There's no perfect answer

By Jeremy M. Simon

Credit Score Report

Jeremy M. Simon covers credit scoring and other issues as a staff reporter for CreditCards.com. Ask a question. 'Credit Score Report' stories

Dear Credit Score Report,
Just how many credit cards should you carry. Visa, MasterCard, Discover, AmEx. Will carrying one card still get you a great credit score? --Linda 

Hey Linda,
It's not the number of credit cards you have -- it's what you do with them -- says the creator of the most widely used credit scoring model.

"Yes, you can get an excellent FICO score if you have only one credit card -- or no credit cards. The key is how you use the credit that you are granted," says Craig Watts, spokesman for FICO, in an e-mail. "People with excellent FICO scores generally follow our three guidelines: 1) pay all bills on time (never be late); 2) if you do have one or more credit cards, keep the balances on your card(s) low, the lower the better; and 3) take on new credit obligations sparingly and only when needed.  If you just follow those three guidelines consistently over time, you won't need to ask anyone how many credit cards you 'should' have."

While you may not need to have any plastic, Linda, you do need to have used some form of credit in order to have a credit history. On FICO's Web site, you can see that "types of credit used" makes up the smallest portion (10 percent) of the categories that influence your credit score. So, Linda, you might not have a credit card, but having a student loan and a mortgage, for example, would show lenders that you can act responsibly with other types of loans. And that good borrowing behavior would show up on your credit report and help boost your credit score.

As for that last tip from FICO, Linda, you might want to think carefully about when you decide to open any new lines of credit. That's because your credit score can suffer a temporary drop when you apply for a new account. Therefore, if you were looking to qualify for a mortgage in the near future, for example, it wouldn't be a good time to also apply for a bunch of credit cards or rack up balances on those you already have.

There's another important thing to also consider in the current economic downturn. Nowadays, card issuers are closing accounts right and left in an effort to protect themselves as unemployment increases and cardholders fail to make payments. So while it might have been enough a few years ago to just have one credit card, it's now a good idea to have more than one credit card -- just in case a bank decides to take action against you even if you haven't done anything wrong.

If a bank does decide to close an account or cut your credit line, that action can cause an increase in your utilization ratio. That's the comparison between the debt you have and the total credit you have access to -- and it's a factor in determining your credit score.

For example, say you currently have $2,000 in overall credit card debt and a combined total of $10,000 available on all your credit card lines. But then the bank closes a card with a zero balance and a $5,000 line of credit, cutting your total available credit in half. That leaves you with much more debt compared to your total available credit ($2,000 compared to $5,000, in this example) -- increasing that utilization ratio.

So, Linda, whether you have no credit cards or a handful, the key to a great credit score comes down to the basics -- paying your bills on time and keeping debt levels low.

Good luck!

See related: How to react to a rate-jack attack, How to cancel a credit card, 10 things you must know about credit reports and scores, 8 legitimate ways to improve your credit score now, How to read, understand your credit report, How to dispute errors on your credit report, Free credit reports: How to get the one that's actually free

Jeremy M. Simon writes about credit scoring, economic data, credit card crime and other issues for CreditCards.com, where he has worked since June 2006. He is based in Austin, Texas. He is a graduate of Vassar College and has previously worked for Thomson Financial in New York City, where he wrote about the stock markets, and Texas Monthly, as well as several publications in Austin.

Jeremy answers a question about a credit scoring issue from a CreditCards.com reader each week. Send your question to The Credit Score Report.

Published: November 10, 2009

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