Having multiple credit cards can be a blessing and a curse. If you can manage, it is a great way to build a shining credit score, and can give you the freedom to make purchases that you don’t want to plunk down all your cash on. On the other hand, if you can’t manage them well, having multiple credit cards can lead to mounting debt problems, and a credit score that’s in shambles—forcing your interest rates to rise and limiting your ability to secure future lines of credit.
Using multiple cards
Whether you have two or five credit cards, keeping track of each card’s balance, line of credit and interest rate is vitally important. Designate a role for each card to play. For example, if you have three cards how should you split them up?
1. The “Manageable” Payments Card
If you have a car or use public transportation often—use one card only for gasoline or to pay for your transportation. At the end of each month pay that card in full. This is your “manageable” card. The card you use to pay for everyday needs that you know you’ll have the cash to pay off at the end of every month.
2. The “Installments” Card
Sometimes you need to use a credit card for something that you just don’t want to or can’t pay for all at once. Your second card should be for these types of payments. It should also be your card with the lowest interest rate. Use this card for whatever payments you know you won’t be able to pay down in a month. However, don’t charge anything that might force you to fall behind on payments. Always pay the bills by the due date, and even earlier if possible. Early payments on credit cards create a positive reflection on your credit history and score. If at all possible, pay more than the minimum balance as well.
3. The “Reserve” Card
Your last card should be the one you never use. Maybe it was your first credit card, and you’ve completely paid down the balance, and got the other two because of rewards programs. Just because you’ve completely paid it off—don’t cancel it. Canceling a card changes the credit to debt ratio of your credit score, and can bring your score down. Keeping the card active will maintain the high line of credit that you have without having to do anything. If it is in fact your first card, the interest rate on this card may also be higher—further stressing the reason why this is the one that you don’t use. This card should have a zero balance—or at least close to one—and should only be used if there’s an extreme emergency that your installments card can’t handle.
Regardless of having multiple cards it’s important to stay frugal. Just because you have the spending power, doesn’t mean you should use it. It’s also important to know your limitations. If you have problems with paying off your debt—don’t compound the issue with multiple cards. If you find yourself already in deep with multiple cards—stop using them immediately, and work towards bringing all the balances down to zero. Once you’ve achieved that, assess if you want to start using credit again. Don’t cancel the cards, and if you can adopt the card structure outlined above.
Angie Picardo is a staff writer for NerdWallet. Her mission is to help consumers stay financially savvy, and save some money with the best personal checking account.