Can You Have Too Many Credit Cards?

Vitaly Pecharsky, chief technology officer for the shopping site SlickDeals.net, is something of a credit card collector and has 40 active credit cards to show for his passion.

I have cards for every situation in life, says Pecharsky, 32, who lives in Las Vegas, Nevada. His portfolio of cards - the oldest of which he's had for 16 years - grows when there's a credit card deal he just can't refuse. Most recently, there was one that offered cash back on dining. He has others that give back cash for anything from gas to groceries. He estimates he gets $2,000-$3,000 a year in rewards and cash back.

His strategy might be tempting at a time when card issuers are increasingly dangling reward offers. About three-quarters of all card offers in the first quarter of 2012 involved a reward program - up from 66 percent in the last quarter of 2011, according to the marketing intelligence firm Mintel Comperemedia.

But, does a guy like Pecharsky - who is something of an outlier since the credit bureau Experian says consumers have an average of three cards and only 15 percent have more than seven - make credit experts cry? Not really. The key for evaluating Pecharsky's 40 cards isn't how many he has, but how much he spends in relation to how many cards he has (and that he has no negatives like missed payments).

You can't have 'too much credit,' but you can utilize too much credit, says Anthony Sprauve, a spokesman for FICO, the company that calculates the leading credit scores. Credit utilization (amounts owed as a percentage of available credit) counts for 30 percent of a person's credit score. The more of someone's available credit they are using the bigger negative impact on their credit score.

If you have $100,000 in available credit and $10,000 charged on your cards, then you have a 10 percent utilization ratio. If you have $20,000 on them, the rate is 20 percent, and so on. For consumers with the best credit scores - at 760 or above - their average utilization rate is 7.0 percent, says John Ulzheimer, president of consumer education at SmartCredit.com, who previously worked for the credit scoring company FICO and credit bureau Equifax.

You might assume that trimming off unused accounts (especially pruning multiple accounts from a big issuer like JPMorgan Chase & Co or Citigroup Inc.) would be like any other housekeeping measure - just ridding yourself of what you don't need. But credit experts like Ulzheimer say that more is better, as long as you aren't tempted to actually use all that borrowing power. It is the unused credit that is valuable, while overusing credit can have the opposite effect.

The danger of overspending has long made it the conventional wisdom in the personal finance world to limit the number of cards you have. But David Bakke, 45, editor of the personal finance site MoneyCrashers.com, currently has eight active cards. It surprises people that I have so many cards since there are many myths that say that simply applying or having multiple cards will hurt your credit score, he says, but he adds, That's just not true.

Both Sprauve and Ulzheimer caution that if you want to embrace this philosophy of loading up on credit, going on an application binge isn't going help. It takes time for your credit history to form. Also, applying for a series of cards one right after the other will push down your credit score, because credit applications have a negative impact.

The next challenge you'll face once you have a stack of new cards is how to keep them all active, using them at least once or twice a year. If you don't, says Ulzheimer, the issuer of the card actually loses money, and eventually they're going to close your account.

Some cardholders arrange to have different bills automatically charged to their different cards every month, just to make sure their cards get some use, but that can involve a lot of bill-paying organizing, too. Fail to pay every credit card bill on time and you can end up with penalty fees and interest high enough to negate the value of those card rewards.

Thanks to the 2009 federal Credit Card Accountability, Responsibility, and Disclosure (CARD) Act, consumers no longer face inactivity fees or charges to reopen a closed card. But if you want a closed account back, you'll have to apply for it anew - meaning a negative to your credit score because another credit report will be run.

When it comes to applying for a larger loan, like a mortgage, the number of credit cards you have won't hurt you a bit, says David Boone, first vice president and head of mortgage origination for The Provident Bank in Jersey City, New Jersey. A bigger problem is applicants who don't have at least three trade lines - credit cards or auto loans - to establish a strong enough history, he says. Someone with a lot of lines and lot of available credit who has kept usage low and maintained a solid history of payment is a good candidate for a mortgage.

We do scratch our heads sometimes, Boone says. Why does that guy have five Visa cards from Chase?

(The author is a Reuters contributor.)