The Pros and Cons of Multiple Credit Cards
Given a qualifying credit score, it is fairly common for people to hold more than one credit card. In the U.S., the average person holds more than 2 cards. There can be distinct benefits to this strategy, though it also comes with risks.
Benefits of Holding Multiple Credit Cards
- Diversified Rewards & Perks: Different cards offer different benefits. You might use a travel rewards card for airline miles or hotel bookings, a cash-back card for retail purchases, or a business card to separate personal and business expenses for tax purposes.
- Increased Total Credit Limit: Having multiple cards increases your total available credit. For example, instead of a single card with a $5,000 limit, two cards with $5,000 limits each allow you to charge up to $10,000 total.
- Financial Security & Backup: Having a backup card is crucial in emergencies where your primary card might be declined, lost, or stolen.
- Risk Mitigation via Diversification: Diversifying spending across multiple cards can limit the damage in case of fraud. If a specific card is hacked, not all your funds are compromised.
- Improving Credit Utilization Ratio (CUR): Credit bureaus look at your CUR—the amount you owe divided by your total available credit. Having more available credit lowers this percentage. For example, if you have $10,000 total credit and spend $3,000, your CUR is 30%, which is better for your score than if you had only $4,000 total credit.
The Risks of Multiple Credit Cards
As fruitful as the benefits can be, there are significant drawbacks to note.
The primary risk is mismanagement and overspending. Statistics show credit card debt is often driven by spending more than what is affordable on unnecessary purchases, emergency services, or necessities during periods of unemployment. Since credit cards are unsecured loans with high interest rates and late fees, mismanaging multiple due dates can lead to steep penalties. More cards simply mean more to manage.
Payoff Strategies: Avalanche vs. Snowball
There are multiple ways to approach paying off credit card debt. The calculator above primarily illustrates the mechanics of a specific plan, but there are two main methodologies people use to decide which card to pay off first.
Debt Avalanche Method (The Mathematical Approach)
The "Debt Avalanche" method prioritizes paying off the card with the highest interest rate first. This strategy ensures that you pay the least amount of money possible overall.
How it works:
- Pay the minimum monthly due on all credit cards.
- Allocate any remaining budgeted funds to the card with the highest interest rate.
- Once that card is paid off, apply those funds to the next highest rate card.
Note: This calculator assumes static interest rates and no further transactions are made on the cards.
Debt Snowball Method (The Psychological Approach)
The "Debt Snowball" method is an alternative for those who struggle with motivation. It focuses on psychological wins rather than pure math.
How it works:
- Pay the minimum monthly due on all credit cards.
- Allocate any remaining funds to the card with the smallest balance, regardless of the interest rate.
Although this may cost slightly more in interest than the Avalanche method, the psychological boost of completely eliminating a debt (no matter how small) often keeps people on track to finishing the plan.
Strategic Tips for Managing Multiple Cards
Organizing Your Payments
- Sync Due Dates: Many issuers allow you to change your payment due date. Scheduling all cards for the same day (or spaced evenly) can prevent missed payments.
- Set Up Auto-Pay: Automatic payments for at least the minimum amount due can prevent accidental late fees and credit score damage.
- Eliminate Redundancy: If you are struggling, consider closing cards you rarely use, especially those with annual fees. You likely do not need three rewards cards with similar benefits.
Dealing with High Interest Rates
- Balance Transfers: Apply for a card with a 0% introductory APR and transfer balances from high-interest cards. Be sure to understand the transfer fees and the rate after the intro period ends.
- Pay More Frequently: Most issuers calculate interest based on the Average Daily Balance. Making payments every two weeks or weekly, rather than once a month, lowers your average daily balance, thus saving interest.
- Consolidation Loans: Personal loans, home equity lines of credit, or refinancing often have lower rates than credit cards. Use these to pay off the cards directly.
- Negotiate: Contact your credit card company to request a lower rate. While this is difficult unless you have stopped making payments (which is not recommended), it is sometimes possible.