The standard personal finance magazine advice is to apply for as few credit cards as possible, ostensibly to keep your credit score high. However, a recent Consumer Report article which tries to make the same case, actually ends up making a better case for applying for a steady stream of credit cards, especially when they are paying you big bucks to do so. Let’s break down the article section-by-section.
How many cards are too many?
Contrary to popular belief, having a lot of credit cards is not detrimental to your score. That’s because one component of the scoring formula is the ratio of balances to credit-limit utilization. The more available credit you have relative to the amount you charge each month, the higher your score is likely to be.
Here, if you have more cards, or at least higher credit limits, the high your credit score will be. Your credit score will also be more resilient, say, if you make a large purchase or spend more than usual on vacation.
Should I apply for several cards?
Your score can be affected by any new credit issued and the number of recent inquiries on your report resulting from your applications for new credit. FICO usually excludes inquiries that show you’re rate shopping for college loans, auto loans, or mortgages, but not credit cards. Every credit card you apply for will be considered a hard inquiry on your credit record; inquiries remain there for 24 months and could affect your score for the first 12.
If you have a lengthy credit history, such inquiries shouldn’t affect your score much, if at all. But if your credit history includes only one other account and you open a new one, the length of your average credit history will be halved and your score will probably drop.
Again, we see that if you only have a few credit cards, then your score is susceptible to dropping with just one new credit inquiry. However, if you have a bunch, then your score is again more resilient. As for the actual effect, a variety of reports from various credit forums has shown me that the effect of a hard inquiry lastly only for about 6 months, and goes away quickly after that. I personally apply for a round of cards every 6 months in response. Note the article carefully dances around this by saying it “could” affect your score for up to 12 months.
Should I keep my oldest card?
It’s a common belief that you should never close the card you’ve held the longest. (The length of your credit history makes up 15 percent of your score.) But credit bureaus usually leave closed accounts on your file for 10 years, so your long-held cards will still be factored into your score after you ditch them. If you’ve obtained other credit accounts over the years, closing one card shouldn’t have a big impact unless it represents a significant portion of your available credit. In that case, closing your old card could hike your balance-to-credit ratio and lower your score.
Yet again, counter-intuitively, by applying for a lot of cards regularly over the last few years, closing cards does not significantly affect my credit score. My average age will always be pretty long. Of course, I still try to keep my oldest cards open.
When should I ditch a card?
I’ll just override Consumer Reports on this one. You should ditch a card whenever it saves you money. If a card charges an annual fee and you don’t think the benefits attached are worth it, then you should cancel it. If your interest rate is too high and you can do better elsewhere, cancel it. Simple as that. If you applied for a new card with a nice bonus and they denied you saying you have “too many cards with us”, then call them up and offer to close your old card, and chances are they’ll be happy to oblige in order to keep your business.