Credit cards have become essential financial tools in today’s world. The ease of access to short-term interest-free borrowing through credit cards not only adds convenience to our way of life, but responsible use of this facility helps build a good credit history and good credit history. score. Additional rewards, be it cash back, reward points, or discounts, lead to greater savings. Whatever the expenses, from offline or online shopping for your household needs, to paying bills and utilities, to fees and subscriptions, using credit cards can be convenient and rewarding. .
Considering how rewarding cards can be and how different cards offer different types of benefits, the question often arises: how many cards should you own? Is there an ideal number of cards? And if there is, should you go? Let’s explore the answers to some of these questions.
Several cards can be rewarding in more than one way. Here are the most important reasons why they can be a good idea.
Higher credit limit
Several credit cards collectively give you a much higher credit limit. A typical no-frills card may offer you a limit of Rs 1 lakh. However, with two of them your reachable limit becomes Rs 2 lakh. Even though they have credit limits below Rs 75,000 together they give you a limit of Rs 1.5 lakh. This can come in handy in emergencies such as sudden hospitalization or urgent purchases of large bills running into the thousands of dollars. Having a higher credit limit saves you from having to organize the required large corpus, either by your own resources or by borrowing from friends and relatives on a very short notice.
Lower card usage rate
Ideally, you should avoid using more than 30 to 40% of your credit card limits. However, it is not always easy to maintain this ratio with just one credit card. There are times when you reach 80-90% of the credit limit, triggering an alert message from the issuer. From the issuer’s perspective, high usage puts you at high risk and may be the reason for a lower credit rating. An additional card means a higher credit limit. So, with a little management, you can make sure you don’t cross the 30% utilization rate threshold.
Better credit score
With a low credit limit usage rate, your credit score tends to improve, making you eligible for larger loans in the future. A better credit rating simply means that your creditworthiness is strong, which is indeed helpful in getting a good financial deal. Plus, smoothly managing two or more credit cards by splitting purchases as well as payments gives you enough practice to manage multiple lines of credit simultaneously, even in the future.
With different billing cycles, your repayment period is also almost fifteen days. This way, while you use both cards in the same month, the repayment is spread over two different months. This management ensures that you are comfortable paying credit card bills.
So, does that mean you need to apply for that second card right away? While there are several benefits of owning multiple credit cards, they don’t necessarily translate into immediate application for another credit card. Here are some situations where an additional credit card might add to your problems rather than solve them:
a) If you are in debt: When there is already a pile of debt that you need to write off, an additional credit card will only add to your debt burden. In such a situation, it is better to avoid it. In addition, you may not meet the eligibility criteria given your level of debt.
b) If you plan to apply for a mortgage in the near future: You must maintain a good credit rating for the home loan (or, for that matter, any expensive loan) to be sanctioned. If you are planning to apply for a mortgage, it is better not to apply for new loan products for a while so that your eligibility will be higher. Plus, applying for a new credit card can lower your credit score, affecting your chances of getting a home loan.
c) If you think you are not financially disciplined: Your first credit card would have already given you insight into your financial behavior, your ability or inability to honor your credit, and your discipline to make timely payments. If you are unsure about maintaining financial discipline or were unable to do so due to extenuating circumstances, it is best to avoid another credit card.
There are reasons to be wary of having multiple credit cards. Managing multiple billing and payment cycles can be difficult. Tracking expenses across multiple instruments can be difficult, as can regularly review these invoices. However, a second credit card can mean a higher credit limit, lower usage, and better rewards, along with a crash course in financial management. So if you are sure that you meet all the required eligibility criteria and are a disciplined user of credit cards, there is no reason why you should not consider getting that second card.
(The author is CEO, BankBazaar.com)