Friday, 17 August 2012

How Many Credit Cards Should I Have?

Most of us are inundated daily by offers for credit cards, each with deals that seem better than the last.  In the last week I personally have received offers or seen advertisements for credit cards at the following locations:
  • From the bank my home loan is with (which is separate to my everyday transaction account)
  • While filling fuel (gas), the fuel company offered a credit card which makes it faster for you to go through the pump
  • I went to buy a birthday present at a department store and when I was at the checkout the girl at the counter asked me if I would like to sign up to that store's credit card program
  • I received an email from my airline frequent flyer program offering a dedicated credit card
  • From another airline I received a credit card offer where I would get a free flight voucher upfront
Most of us would already have one (maybe two) credit card/s and the real question we have is whether we should sign up for another.  There are plenty of benefits and cons to signing up for multiple credit cards and I have outlined a few below.  I should note very early on that this, like so many other situations, is totally dependent on the individual and their financial circumstances and ability to control their impulses and debt.

Pros of getting an additional credit card
  • Extra 'on demand' finance available should you ever require it in a hurry
    • The benefit of being able to have extra funds available when you are in a pinch cannot be overestimated
  • The up front deals or cash backs on some of these credit cards are actually outstanding 
    • The Qantas Frequent Flyer credit card for example offers you 32,000 frequent flyer points if you sign up to their credit card.  You would normally have to spend $32,000 or higher or do some serious flying to get this number of points
    • National Australia Bank (my home loan provider) offers a fee free credit card if you have your home loan with them with no strings attached
Cons of getting an additional card
  • The temptation to spend on this card may be too much for some people
    • If you are not the type of person that controls your expenditure well then getting an extra card is not for you
    • For example some people I know have a very low limit on their credit card because they know they will spend up to their limit every month.  Personally I do not have this problem so my limit is well above $10,000 even though I rarely go above $2,000 in a given month
  • It impacts your ability to get a loan
    • Your credit card limit counts as fully drawn borrowings even though you may not spend even close to the limit.  Because you have the ability to draw down the full amount banks assume you will and so lend you less
    • If you are having problems borrowing how much you want to when you want to buy a house consider lowering your credit card limit to give you some extra funding headroom
  • If you want 'emergency funding' there are cheaper ways then credit cards to get this
    • Although I pointed out above that credit cards provide a useful source of additional funding it is a VERY EXPENSIVE source of funding
    • A cheaper thing to do would be to have a redraw facility on your home loan or a line of credit against it which you could draw down if you ever needed to. 
It really comes down to how well you can control your spending impulses...

If you are good at controlling your spending then the only real downside to having a credit card is that it limits the amount that banks will lend you in the future.  If you find it hard to control your spending or if you are quite impulsive then I would recommend NOT getting an additional card.

...but if the deal is REALLY good you may want to consider REPLACING your credit card

If there is a credit card that offers what you have for a lower fee or one that offers more for the same fee then this is a time when you should absolutely get a new credit card.  THIS only applies if you are going to close your old account down and use exclusively the new card.

How many credit cards do you have?  I only have one but would be interested to see if others operate with more than one card.

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