Is 25 Credit Cards Too Many?

A big topic in the personal finance blogging world is often credit cards vs. debit cards. Another, somewhat related topic is how many credit cards should a person have? This is not a one-answer-fits-all sort of question, but I feel pretty certain that most people would agree that 25 credit cards is a bit much.

Meet Pete D’Arruda, not only does he have 25 credit cards with a total available credit limit of $300,000, but he’s proud of it!

The crazy thing is he’s a personal finance consultant!

Why would anyone, much less a finance consult, think so many credit cards is a good thing? Well, it’s about the almighty credit score. See, one of the major factors in determining your credit score is what’s known as your debt-to-available-credit ratio (or “utilization rate“). This is simply a ratio of how much you currently owe to your total available credit. In D’Arruda’s case, his total available is a mighty $300,000.

So you would expect his debt to available credit ratio to be quite low, and his score to be quite high since he never carries a balance from one month to the next. In fact, he does boast of a 810-815 FICO score.

He also claims to have piles and piles of rewards in the form of cash back, airline miles, freebies and more.

But here’s the problem: You can get a very good credit score and low utilization rate with far less than 25 credit cards. This is just extreme.

Most finance experts recommend keeping your debt to available credit ratio below 30%. This means that D’Arruda has to keep the total of his current balance to under $90,000 to get the maximum benefit to his credit score. $90,000! Most people with $90,000 in credit card balances is likely to have bigger problems than a less than perfect credit score. This is just overkill.

You can achieve the same benefit by having one or two credit cards, and charging less that 30% on them. If that’s less than you spend per month, then use cash for the difference. (Here are 5 more ways to improve your credit score)

Besides having far too much available credit, he’s also opening himself up to 25 different potential points of identity theft.

And I for one wouldn’t want to have to keep track of all those accounts, various balances and rewards programs! And all for a high credit score which may not be all that important anyway.

I will give him credit for having self control. How many people in his situation would simply find themselves six figures in debt?

Related Posts:

• First Premier Bank Credit Card Offer Features A 79.9% APR, a Bad Deal – For The Bank!
• How Your Identity Gets Stolen (and What to Do About it).
• Worst Credit Cards for 2010.
• Heads Up – Your Credit Score May Suffer Even If You Pay Off Your Card Every Month!
• Using Secured Credit Cards To Rebuild Credit.

How Credit Repair Now Can Save You A Lot Of Money Later.

Credit repair is a hot topic these days – largely because it is a crucial element of overall financial health. Without maintaining good credit, you are not only likely at the mercy of lenders should you ever need financing, you are also guaranteed to spend more money than a consumer who maintains a good credit record and solid credit scores.

Why Credit Should Matter Now

Many consumers make the mistake of waiting until the last moment to do something about their credit scores and only make the attempts when they need to secure financing. But waiting until the last minute these days is a measure in ‘too little, too late’. It is important to do something about your credit score now regardless of your timeline or need for financing.

Here is an overview of situations where a bad credit score will cost you big bucks:

Mortgages

Mortgage lenders are scrutinizing credit histories and scores harder than ever thanks to the near-meltdown of the industry a few years ago. There are now stricter lending laws being imposed and borrowers need to come to the table with really good credit in order to have the most opportunities for an affordable home loan. Those without good credit scores will have a tougher time getting lender approval and for loans that are approved the interest rate of the loan will be higher, meaning you’ll spend a lot more money over the life of the loan than if you were eligible for a lower interest rate. Your loan terms and conditions may also be stricter such as requiring more than the typical 20% down payment on your loan.

Auto Loans

Like mortgage lenders, auto loan financing may be impossible for those with bad credit or the interest rate you pay on the loan may be much higher than for other buyers. As a result, you will pay more for the vehicle over the life of the loan, which is essentially a price you can’t make up in the value of the vehicle since most vehicles depreciate as soon as you drive them off of the sales lot.

Auto/Home Insurance

It is not just financing companies that are looking closely at credit scores. Insurance providers are pulling credit scores on customers in order to gauge their potential for claims being filed. Insurance providers use a theory that credit history is relative to claim potential, meaning that those with lower scores are more apt to file an insurance claim. If you have a low score, you will have to pay a higher premium on your auto and home insurance than consumers who have better credit backgrounds.

Utilities/Consumer Services

There are many regular service providers who will pull credit scores before approving service applications. If customers have low credit scores, most providers will require a hefty down payment or prepayment on accounts to prevent risk of the bill not getting paid. For instance, with a low credit score, you may have to put up several hundred dollars on your mobile phone account or if you open a new account with the electric company, a deposit might be necessary to start services. Such deposits are often held for up to a year to gauge prompt payments each month and only then will you receive a credit.

Credit Card APRs

If you are looking to apply for a new credit card but have a poor credit score, your options will be seriously limited. In some cases, you will only be eligible for secured cards, which means you need to send several hundred dollars as a prepayment. Secured cards will also require you to keep up with timely payments to keep the account loaded and change significant fees for transactions and penalties for late payments or over-the-limit charges.

While credit repair is possible by anyone, what is important to remember is that it is a time-intensive process that should begin as soon as possible. Even if you are not anticipating a need for a loan in the near future, there are too many other resources relying on credit scores for you to ignore the importance of your credit standing. Over time and with good financial management practices, you can improve your credit score to where it should be. Today, lenders are looking for borrowers with a credit score of 730 or higher in order to afford the best deals and the most options.

Related Posts:

• First Premier Bank Credit Card Offer Features A 79.9% APR, a Bad Deal – For The Bank!
• Heads Up – Your Credit Score May Suffer Even If You Pay Off Your Card Every Month!
• Using Secured Credit Cards To Rebuild Credit.
• First Premier Bank Exploits Credit Card loophole – for 79.9% APR!
• How Does Debt Settlement Affect Your Credit Score (And More!)

First Premier Bank Credit Card Offer Features A 79.9% APR, a Bad Deal – For The Bank!

I blogged about First Premier Bank Credit Card offer exploiting a credit card loophole in the 2009 CARD act a while ago. I just couldn’t believe that a bank would not only charge customers 79.9% interest but they actually advertised the card to new customers! To be fair, it was targeting people with lousy credit histories, but it turns out that it may have been a bad business move for the bank.

First Premier Bank credit card offer with 79.9% APR is a hit.

According to this article, the initial offering of 79.9% proved popular with customers! What’s this you say? People actually wanted a card with such insane rates? Yes.

It turns out that so many people with poor credit saw it as an opportunity to rack up hundreds to thousands in free charges – and defaulted!

Muhahhaha…

Serves First Premier right!

Miles Beacom, the CEO said:

“A lot of the people ran up the card, defaulted and went directly to charge off.”

As a result, they dropped the rate to 59.9%. “We also tested it at 23%, 33%, 45%, but 59.9% is the one that shows the best performance and where the organization can market the product,”

I’m actually surprised the bank is still offering the card, since the CARD Act capped fees at a max of 25%, and the bank has said they were previously relying on even higher rates to offset the default risk of the customers.

Despite the $135 in annual fees and sky-high interest rates, the company claims to service about 3 million people, with 200,000-300,000 applications each month!

Strange days indeed.

Related Posts:

• First Premier Bank Exploits Credit Card loophole – for 79.9% APR!
• Heads Up – Your Credit Score May Suffer Even If You Pay Off Your Card Every Month!
• Using Secured Credit Cards To Rebuild Credit.
• Is 25 Credit Cards Too Many?
• How Credit Repair Now Can Save You A Lot Of Money Later.

NPSL Credit Cards and the Case of the Unknown Credit Limit.

NPSL Credit Cards, or No Preset Spending Limit cards, sound great. Who doesn’t like the sound of no limits? It turns out that this great sounding deal may be bad for your credit score.

Lenders, creditors and credit scoring institutions like FICO—the company that creates the most-widely used credit score in the United States—consider a broad variety of information when evaluating consumers. In order to be regarded as a responsible credit card or charge card user you must, for example, pay your bill on time each month, refrain racking up debt and avoid going over your credit limit. This goes for NPSL credit cards too.

These are the main tenets to proper spending and most people are aware of their importance. However, many consumers don’t realize the importance of factors like credit utilization, and their credit scores suffer because of it.

Credit utilization

Credit utilization is a balance-to-available credit ratio that organizations like FICO include prominently in their credit scores. It basically measures how much of your available credit you are using—the lower the better—which is important because responsible credit users, the thinking goes, use only the credit they need, not all that is given to them, and leave themselves a significant buffer in case of emergency.

High credit utilization is typically simple to avoid, especially for people with excellent credit. Just make sure that your spending is about 30%-40% of your credit limit each month. But what if your credit card company does not inform you of your credit limit and/or you think your card has unlimited spending? How can you keep your utilization low then?

NPSL Credit Cards.

Credit card companies often don’t provide their customers with concrete spending limits because of a feature known as No Preset Spending Limit (NPSL). Credit cards with this feature—like the charge cards from Chase and American Express, World MasterCard credit cards, and Visa Signature credit cards—have limits that change on a month-to-month basis reflecting various factors such as spending patterns, payment history, and economic trends.

Both this secrecy and the fact that the feature’s name contains the words “no” and “limit” lead many consumers to buy into the myth of the limitless credit card. Still, whether you initially misunderstood the meaning of NPSL or not, you never know what your spending limit is with an NPSL credit card, which makes it difficult to effectively budget and increases the chances that your card will get declined when you try to make a big ticket purchase.

As you might expect, the lack of uniform spending limits for NPSL cards also affects how credit utilization is calculated. According to an NPSL Credit Card Study conducted by CardHub.com in Nov. 2010, credit card companies report proxy limits to the major credit bureaus in place of their cards’ true spending caps or they just report nothing at all. As a result, FICO could consider you to have used more of your available credit than is truly the case or to simply have less available credit overall. Either way, credit damage is possible. The study also discovered that credit card companies use various types of faux limits and that some of the largest issuers—namely HSBC, Chase, and U.S. Bank—refuse to publicly reveal which they report. Thus, an NPSL card’s effect on your credit standing might be both unpredictable and impossible to compensate for.

Recognizing the importance of credit utilization is ultimately very important to garnering the best credit score possible. You must therefore find out what your credit limit is and make sure to keep your spending well below this amount. If your issuer cannot provide you with a definitive limit because your card has NPSL, then you should close your account and get a card without this feature. NPSL is not a reward, it’s a burden, bringing uncertainty and the possibility of credit score damage. Given the fact that NPSL cards are for people with excellent credit, a traditional rewards credit card would be an excellent replacement.

Related Posts:

• How to Repair Your Credit, One Tradeline at a Time.
• How Your Identity Gets Stolen (and What to Do About it).
• Heads Up – Your Credit Score May Suffer Even If You Pay Off Your Card Every Month!
• Using Secured Credit Cards To Rebuild Credit.
• Avoid These 5 Credit Card Rookie Mistakes!