How many credit cards should you have open?

Everywhere I look, some expert’s giving a different answer to the question “How many credit cards should I have?” Apparently, having too few or too many credit cards open can lower your credit rating. I got some interesting free advice on this issue the other day, and thought I’d pass it on.

My situation

I’m completely out of debt, and only use one credit card because it saves me having to carry lots of cash and it gives me some cash back on my purchases. But I have several other credit cards left from the days when I was out of work and having to live off them. I have no interest in these accounts at all, but I am saving to buy a house in a year or so. The other day, I saw a loan officer at Wells Fargo to find out what I’d qualify for on a loan right now, and this is what I got from the conversation:

He generally recommends having five credit card accounts, IF you are paying more than the minimum every month. If you’re paying the minimum or less, it looks like your debt is controlling you and you just keep taking on more cards and more debt. If you’re paying your balances down or not carrying a balance at all, and you’re disciplined enough not to forget to make payments, then having several accounts open tells a lender that you have thousands of dollars you could tap into on those cards if you had trouble making your home/car/college loan/whatever payment, which makes you less of a risk for a loan.

Being out of debt makes loan officers salivate. When I told the loan officer I had no debt of any sort – car paid off, credit cards paid every month, etc. – that immediately motivated him to look for ways to extend me a bigger loan. The upshot was a very decent number on a fixed rate mortgage that made me confident once I’ve saved more toward a downpayment and house prices have fallen lower, I’ll have no problem finding a decent house at a decent price, which will be a great advantage compared to renting (my mortgage should actually be less per month than my current rent, and it won’t increase every year, and I’ll get a tax write-off). On a side note, everyone around here has told me it’s impossible to get a fixed-rate mortgage in this expensive area – it’s interesting that now, when banks are tightening credit requirements, I had no trouble qualifying for one. Excellent credit is your greatest asset when you apply for a loan.

I currently have either four or five credit card accounts open – one of them was closed for inactivity, and I’m waiting for their verdict on re-opening it. If they don’t, I may get another rewards card. I called all my credit card companies today and learned that several of them have great cash rebate programs, and all I had to do to sign up was tell them I wanted to.

If you have several accounts but don’t use them all, remember to use each of them at least once every 6 months. It’s a bit of a pain, compared to having just one card to pay each month, but well worth it to keep those accounts in good standing. And if you are able to pay them off every month, it doesn’t matter what their APRs are. Be sure to ask about rewards programs and other benefits you can get for free. Cash back actually does make a credit card more valuable than cash, and unlike stolen cash, purchases made with a stolen credit card rarely cost you a dime.

But the trick is to know yourself and your limitations. If having a credit card compels you to spend more money, it may not be worth keeping the things around. I know people who feel they have to use checks for everything to keep from overspending. The most important thing is to pay your bills on time and don’t overspend. If you can incorporate credit cards into that mode of living, then keep a few on hand. If not, you’re better off having no credit card accounts but a credit report that tells money lenders you’re a sensible spender who can be trusted with a loan.

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