According to a financial advisor, you should try to stay away from credit cards like the plague, instead of trying to expand your options to multiple credit cards, if you want to steer clear of debt. Being an independent adult, with the capacity to make self-determined decisions for yourself, there is no need to be afraid of making the right commitment towards credit cards.
But remember there is a fine line between not having the “right” amount of credit cards and having far too many credit cards. Here are some things that can help you decide whether you should add another line of credit to your budget.
How Good Are You With Your Current Credit Cards?
Are you the type of person that jumps at every “seasonal sale” or “flash sale”? Are you the first one to choose to pay on behalf of your friends just because you couldn’t resist sharing the oriental food experience with them? What about making significant long-term purchases on your credit cards that are almost impossible to pay off at the end of each month? If you answered yes to any of these questions, you do not need to be in a complicated situation where you have unnecessary lines of credit available to you.
Being ‘good’ with credit cards does not have anything to do with the number of cards you have, what matters is how you manage them. Ideally, credit lenders want to see clients use less than 30% of the credit available to them and make payments of at least the minimum payment due on their cards each month. Even the clients that do not follow these basic rules will be able to ‘have’ a credit card, but the interest rates will be much higher in comparison to someone with a good credit history. If you are having trouble making full payments on all of the credit cards you are currently holding, getting another credit card is just going to drown you into debt.
What Is Your Income?
The credit available to a person has almost no correlation to your salary. Credit card lenders give priority to repayment history rather than income. With that in mind, it still isn’t a bad idea to consider if you have enough resources to pay off an unusually high balance in case of financial emergencies. You can use your debt-to-income (DTI) calculation to get a rough idea of your financial standing.
For example, you have a monthly average credit card bill of $600, a $400 monthly student loan, and a monthly income of $5,000. Your DTI calculation will look something like this:
($400 + $600)/$5,000 = 0.2 this means 20% DTI
Ideally, you should have a DTI ratio of lower than 36% of your total monthly income. In this case, with a 20% DTI ratio, you can safely apply for another credit card. Having too many credit cards will never have a positive impact on your DTI and neither will impulsive buying, in the long run. Instead of trying to diversify your options with many different credit cards, try to find the cards that add the most value collectively to your portfolio.