I believe the ideal number of credit cards is three or less as stated in my post, “How Many Credit Cards Is Too Many?“ One of the main reasons for having three or less is so that you don’t spend too much time playing the churn and burn game for rewards points. Once in a while is fine, but there is a law of diminishing returns.
If you’re spending time applying for new credit cards, reading about new credit cards, keeping tracking of all your credit cards, and canceling your credit cards, then you are taking away time from making more money elsewhere. Your mind focuses on the small picture when it should instead be focused on the big picture. Furthermore, unless you are an organizational machine, you will undoubtedly miss a payment or forget to cancel your card before the introductory period is due thereby negating some of the initial sign up benefits.
Everybody should have at least one credit card for convenience sake. Many credit cards have travel insurance which comes in handy when you lose your luggage in a strange land and need a place to stay. Credit cards help build credit which is important for individuals looking to buy a home or apply for a coveted job. Buyers protection is also a great reason to have a credit card just in case you want to dispute a vendor.
THE IRRATIONALITY OF PERSONAL FINANCE
Given personal finance is pretty straight forward, I’m always curious to understand the kinks in rational reasoning:
Why do people get into so much consumer debt if they don’t want to work forever?
Why do people believe they deserve an “A” lifestyle if they were a “C” student?
Why not join a more lucrative field of work if you want to make more money?
Why freeze for six months a year when you can be warm all year round?
Why quit your job when you can get laid off with health insurance, severance, and unemployment insurance?
Why contribute to a ROTH IRA when the government mismanages our money?
The list of kinks go on and on and I find every single one of them to be fascinating! We all know what we should be doing, yet so many times we can’t be bothered. I’ve written about my own paradoxes by purposefully playing devil’s advocate in order to find clarity e.g. The Dark Side Of Early Retirement. What kind of dummy leaves a multiple six figure job anyway? Ridiculous!
With credit cards, I’ve received a lot of push back from the community on why three credit cards is too little and why we should all be signing up for as many credit cards as possible since it’s free money. One fellow blogger retorted on Twitter,
You have a lot to learn about credit cards my friend :) – guy with
#23cards and a #730creditscore.. #neverbeendenied
I’m thoroughly impressed someone has time to sign up for 23 credit cards. But when the average credit score of a rejected mortgage applicant is 729, maybe not so much. The purpose of my post on the ideal number of credit cards is not to see who can get the most credit cards. The goal of the post is to encourage people to utilize their time more wisely and look beyond the addiction of credit card rewards after a certain point.
EXPLANATIONS FOR MY THEORY ON CREDIT CARDS AND NET WORTH
I postulate the more credit cards you have, the lower your net worth and vice versa. Here are three variables as to why.
1) Age. Young people have more time on their hands. When you have more time on your hands you tend to waste time with suboptimal activities such as spending time on Facebook and credit card churning. Younger people appreciate a $100 benefit more than an older person with a family and a much higher net worth. If you’re only making $15 an hour, the $100 in rewards points is worth seven hours of your working life! If you’re making $100 an hour as a seasoned professional, then you really don’t get excited anymore.
2) Education. If you aren’t an odd duck who spends hours understanding what goes into calculating your credit score like me, then you have no concern for opening up as many rewards cards as possible. It’s like never finding out what ingredients go into your favorite food. If you knew how much buttercream went into your favorite cupcake, maybe you wouldn’t eat it no more! It would be dumb not to open up a Macy’s card which will save you 10% off your $500 purchase. But as you all know, there’s a point of diminishing returns where opening up too many lines of credit begins to hurt your credit score. The lower your credit score the higher the interest rate for bigger ticket items such as a home. The higher the interest rate, the less disposable income you have. The more education one has about real estate, the stock market, interest rate parity, and the make up of calculating a credit score, the less inclined they will be in taking out so many credit cards.
3) Discipline. The “spend more save more” mentality is huge among lower income groups who focus on quantity instead of quality. “Buy One Get One Free” is a staple advertisement ploy at places like Walmart and JC Penney for example. Discount stores compete on VOLUME since their margins are so low due to price. Hence, their goal is to make consumers buy as much as possible, often times much more than they need. The more you cannot control your spending, the less you will have. It’s been shown that cash payers spend much less than credit card payers. Delayed gratification is one of the hallmarks of personal finance. If you crave instant gratification and are addicted to “freebies” then you have a higher tendency to open up multiple credit cards.
Bottom line: There is a strong correlation between net worth, age, education, and discipline.
MY CREDIT CARD EXAMPLE STATES THE CASE
I just look at my own scenario when I was in my early 20s. I had five credit cards because I made way less money, didn’t own real estate, had a much smaller net worth, and valued $1 more than I do now. Now that I’m in my mid-30s I’ve got three credit cards, one of which I just keep open and never use because I’ve had it for nine years. My other credit card is my corporate card which is a must for bookkeeping and tax purposes. My personal spending card is my Barclaycard Arrival World Mastercard since I’m a travel maniac now. The card provides 40,000 signup points and earns me 2X rewards points for every dollar earned if you are looking for a rewards card. The first year’s fee of $89 is also waived.
Perhaps I was able to get $1,000 a year in rewards credit card freebies by churning when I was in my 20s. But if I had spent that time focusing on working harder at my job or coming up with a side business, I’d probably make 10X that amount because of a promotion, a good investment, or a great idea.
The goal is to get out of the small money thinking and get into the big money thinking. If you want to grow your wealth, you don’t want to be hanging out with folks who keep thinking in emergency fund terms.
TIME TO TAKE THE ANONYMOUS SURVEY!
Before clicking on your survey choice below, I’d like for all of you to think about whether there is a correlation between the number of credit cards one has and their net worth and why. In order for this poll to work, please be honest. The poll is completely anonymous.
I’ve included three credit card numbers (1-3, 4-8, 9+) and four net worth figures (less than $75,000, $101,000-$250,000, $251,000-$500,000, $500,000+) for simplicities sake. The average income of readers here is between $70,000-$85,000 based on an old poll hence the $75,000 lower limit. While the average reader age is between 27-34.
I realize there are those with 0 credit cards and broke, and those with 20 credit cards and are multi-millionaires, but you’re a rare bunch so please choose the closest answer to your situation. If you’d like to comment on your net worth feel free to do so as well.
CREDIT CARD RECOMMENDATIONS
Barclaycard World Master Card: If you are an avid traveler and looking for a travel rewards credit card, you can sign up for the Barclaycard Arrival World MasterCard with no annual fee with double the points on travel and dining and 20,000 signup miles ($200 value). Barclaycard offers $200,000 in automatic travel accident insurance, reimbursement for expenses if your bag is lost or delayed, trip cancellation coverage, and $0 fraud liability.
Discover Credit Card: Are you looking for the best credit card for balance transfers, flexibility, and rewards? Check out the benefits of the Discover it® credit card and maximize your purchasing power. You can earn 5% cash back rewards without any annual fees, over limit fees, or foreign transaction fees. And did you know Discover has been ranked #1 for customer loyalty for 17 years in a row? Discover it cards are accepted at over 9 million merchants nationwide and their U.S. based customer service team is available 24/7. Just remember to spend within your means!
Check Your Credit Score: Take a moment to check your free TransUnion credit score through GoFreeCredit.com, a company I trust. 30% of credit reports have errors, which could put a serious hamper on your refinancing or new loan borrowing abilities. I had a $8 late payment I didn’t even know I owed crush my score by 100 points come up during my last refinance. The average credit score for rejected mortgage borrowers has risen to 729 due to more stringent lending requirements. Do you know what your score is?