Multiple Credit Cards: How do they affect your credit score?

Your three-digit credit score is a measure of your creditworthiness. When you apply for a loan or credit with a bank or non-banking financial company (NBFC), the first thing they do is check your credit score. A good credit score or credit report can lead to the approval of your loan application. On the other hand, a bad credit score can lead to its rejection.

Apart from this, there are several other reasons to maintain a good credit score:

· It makes you eligible for loans

As mentioned earlier, a high credit score makes you eligible for availing of loans and credit cards from banks and NBFCs. It reflects that you are a responsible borrower who repays their loan on time. 

· You get loans at lower interest rates

A good credit score (say 750 or more) can help you get the best deal on your loan interest rates. Lenders see such borrowers as less risky prospects and provide them discounts on the interest rates for loans.

· Your loans are approved faster

Lenders will approve your loan applications quickly if you have a good credit score. This will ensure that you don’t have to wait too long to get access to finances during an emergency.

· It adds value to your visa application

When you apply for a visa to visit a foreign country, embassy officials look at your credit score and income tax records. If you have a good credit score, the chances of your visa getting approved improve.

How credit cards help to improve your credit score

Credit cards are powerful financial tools that work on instant purchase and future payment principle. They let you borrow money from a fixed credit line and make payments on the go. You can use your credit card to shop and pay at merchant outlets, make online payments, and withdraw cash from an ATM. It works just like a debit card, except that the money isn’t deducted from your bank account instantly. 

Furthermore, you can enjoy up to 50 days of interest-free credit on your credit card spending. This means you can use your credit card now and repay the amount in a maximum of 50 days without incurring any interest charges. Using your credit card, you can also earn reward points, cashback, and discount vouchers.

If these benefits weren’t enough, your credit card could also help you improve your credit score. Using your credit card wisely and repaying your credit card bills on time can boost your credit score significantly. The primary factors that affect your credit score include your payment history, number of active loan accounts, credit mix, and credit utilisation ratio.

How having multiple credit cards impacts your credit score

Many people keep more than one credit card. This gives them access to a larger credit limit, and they can enjoy longer interest-free credit periods. But the question remains: how do multiple credit cards affect the credit score of a person?

Well, the short answer is that having multiple credit cards can act as a two-sided sword. If you use your cards properly, they can boost your credit score significantly. On the other hand, if you are careless, it can have a negative impact on your credit score.

Let’s look at how multiple credit cards affect your credit score and how you can use them judiciously to maintain a good credit score.

You become eligible for a larger credit limit

A key factor determining your credit score is your credit utilisation ratio. This is calculated by dividing the total credit you have used by the total available credit limit in your name. When you have multiple credit cards, you get access to a larger credit limit. 

For example, if you have one credit card with a credit limit of Rs 50,000, your total credit limit is Rs 50,000. But if you have three credit cards with that same credit limit, your total credit limit goes up to Rs 1.5 lakh. And when you have a large credit limit, your credit utilisation ratio automatically stays low, thereby improving your credit score.

You get the chance to create a clean credit history

Another crucial factor that affects your credit score is your payment history. When you pay all your loan EMIs and credit card bills before the due date, a clean payment history is maintained, and your credit score goes up. The more timely payments you make, the more your credit score improves. So, when you have multiple credit cards, you get to make multiple timely payments in a month, which in turn boosts your credit score significantly.

However, having multiple credit cards also increases your financial responsibility. It can become challenging to manage on-time payments for all of them. And if you miss the payment deadline on any of your credit cards, your credit score can decrease noticeably.

The average duration of your credit history reduces

When credit bureaus calculate your credit score, they consider your average credit history and not the age of your oldest credit account. Every time you avail of a new credit card, your average credit history reduces, and your credit score takes a hit. On average, your credit score drops by five points every time you open a new credit card account. So, do evaluate whether you really need that brand new credit card. 

Please note that there’s nothing wrong with applying for a new credit card. It can actually be beneficial to keep multiple credit cards. However, it is advisable not to have more than three or four credit cards. Also, you should not close any of your old credit card accounts, as doing this can cause a reduction in your average credit history.

You start to get more credit inquiries 

Every time you apply for a new credit card, your lender makes a soft inquiry on your credit score. The process pulls out your credit report to evaluate your creditworthiness. And every time a soft inquiry is made on your credit report, your credit score falls. Regardless of whether your credit card application is approved or rejected, your credit score suffers.

Therefore, you should refrain from applying for new credit cards frequently. Ideally, apply for a new credit card at least six months after taking the previous credit card. This will ensure that even if a soft inquiry lowers your credit score, it can bounce back. Another thing you can do is to apply only for a pre-approved credit card, as lenders make no credit inquiries for these cards.

For example, you can get a pre-approved IDFC FIRST Bank credit card by simply applying for it online. To check your pre-approved credit card offers, click here.

Conclusion

As you just saw, having multiple credit cards can boost your credit score. However, it is crucial to manage all your cards wisely and keep track of their usage. If you fail to use them properly, your credit score can take a hit. Also, remember to be watchful before applying for a new credit card because this can cause your credit score to drop.

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.