Credit cards are everywhere, and the average American actually has four open accounts. You’ll find ads for credit cards all over the Internet, in commercials on television and applications for store cards at nearly every retailer.
And when you return home from shopping, you’ll likely find credit card advertisements and applications in your mailbox.
Every time you see one of these ads, you might ask yourself, “Should I get another credit card?” But to find the answer to that question, you’ll need to ask yourself several other important questions.
If you are asking yourself, “Should I open up another credit card?” you have come to the right place. Now let’s break each of these down, question-by-question to take a closer look.
Credit cards are incredibly valuable financial instruments for several reasons.
First, they offer a secure form of payment. When you use a credit card to make a purchase, it’s backed by the Fair Credit Billing Act, which is a strong federal law. This law protects you from any fraud and billing errors that you report to your card issuer.
While the law specifies that you’ll never be liable for more than $50, all of the major credit card payment networks (Mastercard, Visa, American Express and Discover) have zero liability policies that promise to fully reimburse you for your losses.
In contrast, check fraud is relatively common and can take a long time to sort out, and stolen cash is rarely recovered.
Debit card transactions are more secure than cash or checks, but aren’t protected by the same laws as credit card transactions. Plus, a mistaken or fraudulent charge to your debit card immediately results in a loss of funds that must be recovered later.
Finally, most credit cards now offer contactless payments, which in the age of the novel Coronavirus, people find safer than handling cash that has passed through countless hands.
Credit cards are also incredibly convenient. You don’t have to carry around large amounts of cash or a checkbook just in case you need to make a large purchase.
Credit cards can also offer rewards for your purchases in the form of cash back, points and miles. Many cards also offer valuable travel and shopping benefits as well.
But the defining feature of a credit card is the ability to finance a purchase with it.
Every credit card purchase represents a loan by the card issuer to the cardholder. While you can avoid interest charges by paying your balance in full and on-time, you can also choose to extend payment on your purchase.
Applying for a new credit card is an important financial decision, and one that must be made with your financial goals in mind.
Here are two common financial goals to consider before getting a new credit card…
One financial goal could be to build your credit.
Having several credit cards could further this goal, but only if they’re managed responsibly. This means that you have to pay all of your bills on time, and carry very little, if any debt.
When you manage a new credit account responsibly, it adds positive information to your credit report and can raise your credit scores.
Another important goal may be to pay off existing credit card balances.
Here, a new credit card can be valuable, but only if it offers a 0% APR promotional financing offer for balance transfers.
These offers allow you avoid interest charges while you pay down your balance. Although you’ll usually incur a balance transfer fee (which is added to your new balance), 100% of your payments made during the promotional financing period will go towards paying down your principal.
Getting a new credit card with a promotional financing offer will only align with your goals if you do everything that you can to pay off your balance while the 0% APR offer applies.
There are many people who believe it’s bad to have more than one credit card, but that’s not necessarily true.
You should never have more credit cards than you can manage responsibly.
So if you’re unable to manage one credit card responsibly, then the right number of cards for you is zero.
But if you’re able to manage multiple credit card accounts responsibly, there are several reasons why it makes sense to have more than one credit card.
First, having multiple cards can help you to build your credit more quickly. But this effect is limited and you won’t see any advantage in having more than four to six cards.
Having multiple cards can also allow you to take advantage of different rewards and benefits programs offered by competing products. And should one credit card be lost or stolen, it’s nice to have a backup credit card available.
But again, it’s critical that you always pay your bills on-time and carry little, if any, debt.
And if having multiple credit cards tempts you to make unnecessary purchases or incur debt you wouldn’t otherwise have, it might be a bad idea for you to get another credit card.
Some worry that just applying for a new credit card will hurt your credit score, but this is rarely the case.
According to FICO, one of the leading providers of credit scoring models, your recent applications for credit make up just 10% of your FICO score. This 10% of your FICO score looks at inquiries for new credit, often called hard inquiries, as well as new accounts that have been recently opened.
But your amount of new credit has far less influence on your credit score than your payment history, which makes up 35% of your score, or your amounts owed, which makes up 30% of your score.
Having a single new credit card application can only have a very small effect on your credit, and it doesn't last very long. And when you manage your new card responsibly, you add positive information to your credit reports, which will likely outweigh any negative impact from adding an additional new account.
It’s only when you apply for multiple new lines of credit in a short time that your new credit can significantly lower your credit score.
That’s because the credit scoring formulas consider multiple applications for credit to be an indication of serious financial problems, like when someone is looking for multiple new loans to cover financial hardship.
When you’re in the process of applying for a home mortgage or a refinance of your existing mortgage, don’t apply for any new lines of credit.
Applying for a mortgage is a lengthy process, and one that’s different from any other type of loan application. Mortgage lenders will keep a constant eye on your credit, and any changes could cause the lender to reconsider your approval.
Applying for new credit at the same time you apply for a mortgage will be a big red flag.
So from the moment you submit your application until after you close on your mortgage or refinance, don’t apply for any new credit cards, including store cards.
Once you have a single credit card account, you might decide that opening a second or even a third account will help you achieve your financial goals. But how long should you wait before opening the next account?
Before opening a new account, you should feel comfortable that you’re responsibly managing your first account. Once you’re confident you can reliably pay your bills on-time and carry little, if any debt, there’s no reason you have to wait before applying for a second credit card.
When it comes to your third and additional credit cards though, it’s best to space out the applications by a few months. Having too many recent applications and new accounts opened can hurt your credit score.
There are some credit card users whose goal it is to earn as many rewards as possible. In fact, there’s an entire community of people whose hobby is to maximize the amount of rewards and benefits they can earn, which is mostly focused on travel rewards.
It is possible to earn lots of points, miles, cash back and benefits from your credit cards, but you have to be extremely careful.
First, this strategy is only for those who always avoid interest charges by paying their balances in full and on-time. Otherwise, the value of the rewards you earn will almost certainly be less than the cost of interest.
Just as important is your ability to avoid making unnecessary purchases just to earn rewards. Even when you can earn rewards worth 5% of your spending, you’re still losing 95% of the purchase price of an unnecessary purchase.
Realistically, only a small percentage of credit card users can avoid these problems.
If you’re sure these issues don’t apply to you, and you can manage your credit cards responsibly, then it could make sense to apply for a new credit card just to receive a generous sign-up bonus, earn rewards and take advantage of valuable cardholder benefits.
Doing so without missing payments or incurring debt won’t negatively affect your credit score.
There are almost as many choices for credit cards as there are for shoes. And just like buying a pair of shoes, you need to find one that fits and will serve its intended purpose.
To find a card that “fits,” know what your credit score is and be sure there’s a good chance that you’ll qualify for the card you apply for.
If you’re new to credit, or have had credit problems, you’ll need a card that’s designed for your credit profile. Typically, those who are new to credit but haven’t had any problems will qualify for a simple card that doesn’t offer rewards, or a store credit card.
But if you’ve had serious credit problems, then you’ll need to look for a card specifically designed to rebuild credit. These will be either a so-called subprime card, or a secured card.
A subprime card will offer a very small line of credit and usually imposes high fees and interest rates.
In contrast, a secured card will have a much lower annual fee, if any, and can have a much lower interest rate.
However, a secured card will require you to submit a refundable security deposit before you can open your account. Otherwise, a secured card works exactly like a standard, unsecured card.
While there's no minimum credit score needed to apply for a secured card or even a subprime card, you shouldn't have any pending bankruptcies or delinquent accounts or your credit card application may be rejected.
For those with good or excellent credit, you can choose a simple card that doesn’t offer rewards, has a low interest rate and few fees.
Or you can consider one of the many rewards cards, which typically have higher interest rates than similar cards that don't offer rewards, and may have an annual fee. Rewards cards are best used by those who will always avoid interest charges by paying their credit card balance in full.
If you need to carry a credit card balance, find a card with the lowest possible interest rate, which won't be a rewards card. And it doesn't make much difference if you apply for a new card from the same card issuer or from a different one.
Finally, you may wish to find a card that offers a 0% APR promotional financing rate on new purchases, balance transfers or both. But it’s important to use these offers to pay off your debts, and not just to postpone doing so.
Once you’ve been approved for a new credit card, you can either keep your old card or close the account.
For most credit card users, it will make sense to keep their old account open. Then you can use both cards, or just keep one as a backup.
So long as there’s no annual fee, keeping an unused card open and in good standing will only help your credit score as it adds positive information to your credit reports and extends your credit history. And having a credit card with a zero balance won’t hurt your credit score.
But if you fail to use it for any transactions for one year, your card issuer could close your account due to inactivity.
The main reason that many people close the account of an old credit card is that it charges an annual fee. There’s certainly no reason to pay an annual fee if you’re not using your account to make purchases or utilizing its cardholder benefits.
Thankfully, many card issuers will offer to downgrade your account to a card that doesn’t have an annual fee.
Your decision to get another credit card is an important one, but it shouldn’t be too difficult to make. Take into account your credit history and financial goals while finding the right card for your needs, and you’ll be sure to make the right decision.
Jason Steele has been writing about credit cards and personal finance since 2008, poring through the terms and conditions of credit card agreements to understand the minutiae of how these products work. His work has appeared on Yahoo, MSN, HuffingtonPost and other major news outlets. In his free time, Jason’s a commercial pilot. He graduated from the University of Delaware with a degree in History. See Jason on Linkedin.
Lauren Bringle is an Accredited Financial Counselor® with Self Financial– a financial technology company with a mission to help people build credit and savings. See Lauren on Linkedin and Twitter.