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Why having a credit card can be beneficial
Having a credit card, and using it responsibly, is a good way to start building strong credit, said Ted Rossman, senior industry analyst at CreditCards.com.
establishment Good credit is “essential” to qualify for loans like a mortgage or car loan, and for other things like buying a cell phone, renting a car or getting a job, the Consumer Federation of America grades. Strong credit also helps consumers qualify for lower loan costs.
However, not everyone uses a credit card in a financially optimal way. Eighty-two percent of American adults had a credit card in 2022, according to the US Federal Reserve. About half of them carried month-to-month balances at least once in the past year. Since credit cards often carry high interest rates, carrying a balance (meaning not paying off a card in full each month) can add significantly to your household costs.
Rossman recommends first-time cardholders get a card with no annual fees and no interest, at least initially, and pay their balance in full and on time each month. It’s important to make sure the interest rate is relatively low after the initial interest-free offer runs its course.
There are virtues to sticking with just one card, experts said.
Among the biggest: It’s easy to keep track of a single set of expiration dates and other key details, like card benefits, said Bruce McClary, a senior vice president at the National Foundation for Credit Counseling.
“If it’s limited to one card, it helps simplify the debt management process,” McClary said.
Benefits of having more than one credit card
However, there can be drawbacks to having only one credit card. For one thing, not all companies will necessarily accept your card brand.
“In those cases, it might make sense to have two different types of cards: Visa and Mastercard, for example,” McClary said.
Similarly, a consumer running a business can separate personal and business expenses by using two cards, he added.
Consumers may prioritize a solid all-in-one card as their primary, experts said. A good “base” for users might be a card with no annual fee that pays 2% cash back on all purchases, for example, Rossman said.
A second would likely be based on how consumers shop and how various cards dole out rewards and benefits, experts said. For example, frequent travelers can benefit from a card geared towards travel rewards and it comes no foreign transaction fees.
“This is where you have to make some decisions for yourself,” McClary said. “You have to think about your daily life, where you shop and where you’re most likely to redeem the points you’re earning.”
Websites like NerdWallet and CreditCards.com can help you determine the best reward card for you, McClary said.
Also, having a second credit card, or more, can help build a person’s credit utilization ratio, said Curtis, founder and chief executive officer of Curtis Financial Planning.
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This is the ratio of what consumers owe in relation to their total credit limit. Credit utilization is a major determinant of a person’s credit score, and having one that is too high can lower your score.
Cardholders should keep their ratio below 30% on all accounts, experts said. So, in a basic example, a consumer with a credit limit of $10,000 would not want his or her balance to exceed $3,000.
Having more than one card increases your overall credit limit and, with responsible use, can lower your credit utilization rate.
“If a person needs more than one card to keep their credit utilization ratio down, then I would say that’s a good reason to have more than one card,” Curtis said.
But this is a balancing act.
Having too many cards can sometimes make users seem like overzealous borrowers and therefore lower their credit scores, even if they have low balances, McClary said. Lenders get the perception of a “compulsive borrower” if there are too many credit applications in a short period of time, he added.
Spreading applications, one or two in a six-month period and no more than five in a two-year period, is generally safe, Rossman said. That includes applications for all types of debt.
Also, having multiple credit cards can increase the costs of having credit if they have annual fees, McClary said.
It’s “critical” for consumers who are disorganized or tend to overspend and carry balances on their cards, rather than paying off their balances in full each month, limit their cards, perhaps to just one, Curtis said.
“If a person is more fiscally responsible, I don’t see any harm in having more than one card,” he said.
In general, consumers should always strive to pay off balances each month, automate their monthly payments and get a card with the lowest interest rate possible, he added.