How Do Multiple Credit Cards Affect Your Credit Score

Credit cards play an important role in the way most of us spend, be it during online shopping or while booking flight tickets. Many a time, discounts and reward points that are available with such a type of spending are the main reason why people choose credit cards over debit cards.

If you are a regular credit card user, chances are that you have been chased by other banks to also use their cards or you are already using more than one such plastic card. Again, different credit cards come with unique offerings only for a particular type of shopping. For instance, some cards provide cashback for online shopping while others give discounts for ordering food online.

Despite their many advantages such as availability of interest-free loans for 45-50 days and vast acceptance in physical as well as online mode, credit cards have an equal number, if not more, disadvantages.

Given the ease of using credit cards, one can quickly land into a debt trap if they do not keep track of their spending or fail to make repayments on time. The more cards one uses, the more will be the credit limit but that comes with the hassle of keeping a track of all the due dates and spending patterns. Remember, there could be a temptation to spend more just because you have an available credit limit. This can potentially put you in financial trouble if there is no matching income to make credit card payments on time.

So, is it bad to have more than one credit? Or is there a limit on the number of credit cards one should hold?

At the outset, there is no clear yes or no answer to these questions. Keep in mind that more than the number of credit cards, how much credit you use and how disciplined you are in making the payment on time are most important. Both these factors influence a person’s credit score.

Credit History

A credit score represents your creditworthiness. This three-digit number is usually in the range of 300-900. If you apply for any loan with any bank or NBFC, the lending institution will check your credit score to determine the risk involved in giving credit to you.

Those with a credit score of 750 or above are considered very good and these borrowers can negotiate for a better interest rate because the risks involved are lower. Their loan application is also approved faster. There are other benefits, too. A good credit score along with tax records are often checked while reviewing visa applications.

For credit card users, the credit score is determined by credit bureaus based on various parameters such as payments history, utilization ratio, average credit history, and frequency of new credit card applications.

Repayments

This is the most important element that impacts your credit score. Timely repayment indicates disciplined financial behaviour. By extension, the borrower is seen as less risky.

A clean credit history helps in keeping a higher credit score. Those with multiple credit cards will have to ensure that all the payments are made within the due date. Doing so will boost their credit score.

On the other hand, any delay in repayment can significantly lower the credit score. Late payments remain on the credit report for five to seven years, and hence can impact the credit score for a long time.

Utilisation Limits

This ratio measures how much of the available credit limit is used. Experts suggest that out of the available credit limit, not more than 30% must be consumed. Usage beyond this limit has a direct bearing on the credit score.

Now, multiple credit cards give you a higher credit limit, thereby also giving you a higher utilisation limit. But users must ensure that even on the total limit, not more than 30% is used. For example, if you have three credit cards having Rs 1 lakh of limit on each card, then not more than Rs 90,000 should be used at any given point in time.

In case, borrowers decide to close one of the credit cards, they must increase the limits on other cards in order to keep usage within the 30% cap by prioritizing spending.

Average Duration

The credit history of borrowers is another important metric that is evaluated to arrive at the credit score. Here, average credit history is considered and not the age of the oldest credit card. Those with a long history and an excellent record of payments and utilisation have a higher credit score. So, every time an application is made for a new credit card, remember that it can drag down your average credit history and lower your credit score.

Inquiries

Every time one applies for a new credit card, the bank makes a soft inquiry on the credit scores to assess the applicant’s creditworthiness. And every time such an inquiry is made, the credit score falls irrespective of whether the application is rejected or accepted.

Another important aspect is the timing of making such inquiries. Frequent inquiries can lead to a significant drop in credit scores. This can be avoided by ensuring that new applications are made with a gap, ideally of at least six months. Users can also check if they have a pre-approved credit card offer by any bank.

Conclusion

Credit cards are a useful financial instrument that can help you in taking care of expenses, especially in times of emergencies. While there is nothing wrong with having more than one credit card, users must ensure that all the cards are suitable for their spending habits. Those already with multiple credit cards, don’t rush to close them. Instead, ensure that payments are made regularly, and spending is in check by keeping utilisation within a limit.

Prospective borrowers can also explore the possibility of taking out a loan from a reputed bank or non-banking finance company instead of using multiple credit cards to meet their requirements. Typically, a personal loan or gold loan or a business loan from reputed lenders such as IIFL Finance come with lower interest rates and flexible repayment schedules. IIFL Finance provides such loans via a simple application process that can be completed online in just a few minutes.