This article was contributed by credit expert John Ulzheimer.
How many times have you read a blog or heard some financial “guru” opining as to the mystical “right” number of credit cards to have in your wallet? Is the right number one, or two, or three? And what is the criteria for considering what is the right number versus the wrong number?
I’ll let you in on a little secret, there is no right or wrong number. It’s just an excuse to write a blog. If you are comfortable with one credit card, then one is the right number for you. If you need four to operate efficiently, then four is your right number. If you hate credit cards, then maybe zero is your right number.
When considering the right or wrong number of credit cards, nobody ever seems to focus on credit scores as part of their consideration. Well, that’s exactly what I’m going to do. And the reason I’m going to do so is because from a credit scoring perspective there actually is a right number of credit cards.
The Revolving Utilization Ratio
There is a metric in credit scoring systems called revolving utilization. Revolving utilization, often referred to as the balance-to-limit ratio, is the relationship between your credit card balances and your credit card limits, expressed as a percentage.
The ratio is calculated by dividing the aggregate of your balances by the aggregate of your credit limits, thus yielding a percentage. The higher that percentage, the fewer credit score points you’re going to earn from that metric. The lower that percentage, the more points you’re going to earn.
Reports about the optimal percentage are all over the place, with many of them being wrong. For FICO the optimal percentage is actually 1%, which is next to impossible to pull off. So, we have to go to the average percentage for the people with the highest average FICO scores, those with 750 and above. For those folks the average utilization ratio is 7%. For VantageScore the optimal percentage is anything less than 30%.
Now, that doesn’t mean you have to have 7% or 30% in order to have solid credit scores. You’ll just need to hit those targets if you want the highest possible scores, something that’s infinitely important right before you apply for a loan.
Let’s go back to the topic of this blog, which is the right number of credit cards. The right number for you is going to be the number of cards necessary for you to maintain 7% utilization relative to your normal credit card spending patterns. That way you don’t really have to worry about your credit scores, ever. If you can hit 7%, or close to it, on a monthly basis then you’ll do as well as possible under both credit scoring platforms.
What you need to do now is download your credit card statements from the last 12 months. Add up the balances from all of the statements, and divide that number by 12. That will give you your average monthly amount of credit card debt appearing on your credit reports. Let’s say, for illustration purposes, your average monthly balance from all of your cards is $5,000.
Now we just need to figure out what credit limits you need from all of your cards in order for $5,000 to represent 7% of the aggregate credit limit. I’ll do the math for you…you’re going to need about $70,000 of credit limits for $5,000 to represent 7% of the limit because $5,000 divided by $70,000 equals 7.1%.
$70,000 sounds like a really large number, but in the world of credit card credit limits, it’s actually not that big of a number. In fact, if you have two credit cards each with limits of $35,000, you’re already there. For many of you, however, you’re going to need more than two cards.
This becomes the answer to your question about the right number of cards. If it takes six credit cards for your average monthly credit card balances to equal about 7%, then six cards is the right number for you. If it takes ten cards, or 13 cards, or three cards…then those are the right numbers for you.
John Ulzheimer is a nationally recognized expert on credit reporting, credit scoring and identity theft. He is the President of The Ulzheimer Group and the author of four books about consumer credit. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. He has 27+ years of experience in the consumer credit industry, has served as a credit expert witness in more than 370 lawsuits, and has been qualified to testify in both Federal and State courts on the topic of consumer credit. John serves as a guest lecturer at The University of Georgia and Emory University’s School of Law.
Disclaimer: The views and opinions expressed in this article are those of the author John Ulzheimer and do not necessarily reflect the official policy or position of Tradeline Supply Company, LLC.