Searching for the 'ideal' number of credit cards

How many is too many?

By Helen Fowler

Do you have a wallet bulging with plastic, or do you rely on a single credit card? Maybe you have a card you use regularly, and one or two backups. Whatever your situation, you may have wondered at some point whether you need fewer or more cards.

But a perfect number of credit cards is an illusion, a bit like a "perfect partner" or a "perfect job." It's more about your approach than anything else. how-many-credit_cards

"There is no ideal number of credit cards for each individual," says Richard Catlin, marketing manager at Check My File, a service that provides UK consumers with access to multi-agency credit reports. "The number of cards is not that important."

Of course, applying for several cards in a short timespan can dissuade lenders, as they could see it as a sign of desperation. But your credit rating doesn't factor in the number of cards you hold, just what you do with them. You can get into as much trouble with one card as you can with 10. If you're charging more than you can afford to pay back, you are headed for trouble, no matter how many cards in your wallet.

Here are some guidelines to figuring out if you need to cut up a card or two, or if you can handle adding another.

1. Look at your debt-to-income ratio
The single biggest factor providers look at is your debt-to-income ratio -- how much you owe compared to how much you are earning.

Like having an ideal number of cards, the ideal debt-to-income ratio depends on your own financial situation. Different lenders will have different opinions on whether your debt-to-income ratio is reasonable, but in general, most lenders look for it to be no higher than about 36%-40%. To calculate your debt-to-income ratio, divide your monthly debt by your monthly income.

It doesn't make much difference whether the debt is spread across 10 cards or just one, Catlin adds. Credit scores depend on your usage of all available credit lines, so it doesn't matter if you split a big purchase between two cards -- you'd still be using the same percentage of your income.

2. Leave yourself enough headroom
"Headroom is a big factor," says Catlin. That is, the gap between your balance and available credit. "It's a sign of indebtedness, one of the things they always look for."

What lenders are most interested in is the amount of credit outstanding on your cards, according to Catlin.

"Having a number of cards close to their limits could indicate you are struggling to stay within your monthly limits," he says. "Those are the things [lenders] are going to scrutinise."

"We recommend people keep their card balance to below 25% of the limit to maximise their credit scores," says James Jones, head of consumer affairs at Experian. If you use a lot of your available credit, creditors begin to view you as a risk for repayment.

3. Don't bite off more than you can chew
The more cards you have, the more you might be tempted to use them all until you are over your head in debt.

Consider, too, the logistical problems. Holding a sheaf of plastic will make it harder to keep track of what you've spent and how much you owe in monthly payments. Avoiding late payment fees can be easier with fewer cards to manage.

If organisation isn't your forte, taking on several cards could leave you backed into a corner. But if you keep diligent track of where your money goes, there's no reason you can't handle a travel credit card, a rewards credit card and an everyday-use credit card.

Likewise, if you tend to spend compulsively, keeping fewer cards is a good way to curb the temptation. If you spend only what you budget, having five credit cards probably won't be a problem.

See also: Does applying for credit hurt my credit?; Dangers of "churning" cards for bonus points

Updated: 28 February 2014