As a credit card rewards enthusiast and credit expert, I am constantly asked the same set of questions. Not only do people want to know if credit card rewards are “real,” but they also want to know how pursuing them will affect their credit.
And it makes sense to be cautious. As we know, your credit score is an incredibly important component of your overall financial health. Without great credit, you may not be able to qualify for the best mortgage rates, borrow money to start a business, or get the best auto insurance rates. Meanwhile, an excellent credit score can help you accomplish all of those things – with the added bonus of qualifying for all of the best rewards credit cards.
In addition to general rewards questions, I also hear a lot from people who are afraid to push it too far. Once they get one rewards card they like, they worry that adding a new card will somehow hurt their score.
It makes sense to worry, but this is one case where the added stress is completely unfounded. Here’s the truth – you can have several rewards credit cards without wrecking your credit at all.
Here’s Why Having Multiple Cards Won’t Wreck Your Credit
In order to understand why having more than one rewards card won’t wreck your credit, you have to understand how your credit score is determined. As an example, let’s look at how FICO scores are calculated:
How a FICO score breaks down:
- Payment history: 35%
- Amounts owed: 30%
- Length of credit history: 15%
- Credit mix: 10%
- New credit: 10%
As you can see, the most important factor is your payment history. If you make your payments on time every month, you will fare well in this category no matter what.
The second category – amounts owed – is the other main category you should worry about. This compares how much money you owe in relation to your credit limits, a figure which is commonly referred to as your balance-to-limit ratio, or “utilization.” Here’s how credit reporting agency Experian describes this factor:
“Your balance-to-limit ratio, also known as your utilization rate, is calculated by dividing the total of the balances on your credit cards by the total of the credit limits on your credit cards. A high balance-to-limit ratio warns creditors that you may be experiencing financial difficulty or using credit to live beyond your means. A high utilization rate is a strong sign of credit risk, second only to your payment history.”
This is where things get interesting — and where having more than one card can actually help your credit score.
Since your utilization is based on how much you owe on your cards in relation to your credit limits, having more available credit means a lower utilization rate — and thus, a higher score — as long as you’re not carrying a higher overall balance along with it.
Meanwhile, if you pay your credit cards in full each month before your bill is due (as you should), your utilization will always be zero no matter how many cards you have. In that sense, having more than one card will have little impact on your credit.
- Related: What Is a Good Credit Score?
How Hard Inquiries Impact Your Credit Score
One determining factor where applying for new cards can negatively impact your credit score is “new credit,” which makes up 10% of your FICO score.
Each time you open a new account, you will gain a new “hard inquiry” on your report. A hard inquiry is a simple notation on your credit report that lets creditors know you applied for new credit.
Although a few hard inquiries aren’t cause for concern, they may cause your credit score to drop temporarily. If you’re worried about how a new inquiry will affect your score, consider this advice from myFICO.com:
“First off, don’t sweat this too much; applying for new credit only accounts for about 10% of your FICO score, so the impact is relatively modest. Exactly how much applying for new credit affects you depends on your overall credit profile and what else is already on your credit report. For example, applying for new credit can have a greater impact on your FICO score if you only have a few accounts or a short credit history.”
In other words, a hard inquiry may have little impact on your credit score at all, especially if you have an established credit history already.
Meanwhile, any negative impact you do experience should only be temporary. Still, to be safe, avoid applying for a slew of new cards in the weeks before you expect to take out a mortgage or car loan — you want your score to be at its absolute best in those circumstances.
My Experience with Multiple Cards
When my husband and I started pursuing credit card rewards four or five years ago, our scores were in the low 800’s. I track our credit scores on CreditKarma.com and, as of today, our Equifax and TransUnion scores are 810 and 790 (me) and 800 and 790 (my husband), respectively.
Since an excellent credit score is typically considered anything over 740, I’d say we’re doing quite well – and that’s in spite of the fact that we have dozens of rewards cards across our personal profiles and three separate businesses.
Our experience serves as further proof that having more than one rewards card will not wreck your credit. However, it is crucial that you always pay your credit card balances in full every month. A new rewards card or two may not hurt your credit, but letting yourself get into credit card debt can have lifelong consequences.
As always, tread carefully – and if you’re worried you’ll get in trouble, it’s probably best to avoid rewards credit cards altogether.
Do you have multiple rewards cards? How has having multiple cards impacted your credit?