Yes, it is true that the number of cards that you hold has an impact on your credit profile. You might have always thought otherwise with an assumption that lower exposure to credit will result in better credit score. But contrary to this belief, fact remains that in the overall scheme of credit risk evaluation credit cards play a highly important role. So if you are the one who has always constrained yourself to go beyond that single plastic in your wallet, it is time to rethink the strategy. Let us dwell on this further.
Credit utilization ratio
Your credit utilization ratio has a major impact on your score. Now, what actually is this credit utilization ratio? This is nothing but the overall value of credit that was actually disbursed and the current outstanding. For example you have taken only one loan for Rs 200,000 two years back and the current outstanding is at say Rs 100,000, your credit utilization is at 50%. A lower utilization ratio directly impacts the score in a positive way.
Now let us look at an example, to understand how credit cards will help to impact this ratio.
In addition to the above status where you have a utilization ratio of 50%, you take a new credit card with a limit of Rs 50,000. Your ratios change immediately since the value of credit has increased to Rs 250,000. With an outstanding of Rs 100,00, the ratio comes down to 40% and thus impacting this important factor that impacts your credit score.
Unlike loans where the complete disbursed amount is your utilized amount and gradually comes down with years, in a credit card the limit adds to the overall exposure, only the actual utilization adds to the outstanding. So owning multiple cards will make sense if you are looking at improving your credit profile.
While having multiple cards do help but you need to answer the answer to the following two question before taking that plunge.
How many cards should you own?
While you now have understood that holding multiple cards has its own benefit, but how many cards should you own? Beware; if you continue to add new credit cards till you have exhausted the options, the exercise may turn into a deterrent for lending institutions to extend other forms of a loan to you. While you may not use these cards, but from a lender’s perspective these limits available that can be utilized at any point in time and can lead you into a debt trap.
Tricky question? Indeed it is. The credit experts claim that owing a figure of 3 on credit card front is good. So limit yourself to this figure.
How to utilize these cards?
Utilization of these cards will also have an equal impact on that three digit expression of your credibility on the credit report. Follow a simple rule not to utilize beyond 30% of the overall credit limit assigned to you unless there is a dire need.
Some people may also feel that adding cards would suffice and not using them will have similar a impact as would utilizing them to 30%. This may not be true since the credit score is an outcome of your activities and not on non-activity.
Having said that, if you have even slightest of doubt that you may not be able to curtail yourself on spends on cards, then it is highly advisable not to own multiple plastics. End of the day, these are to help you establish and improve your credibility and not push you under debt. Please be aware that credit card debt is one of the leading reasons for people to get into a debt trap.
So go ahead apply for those additional cards and use them judiciously to help you better your credit profile.
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