Judging from our inbox, there seems to be a lot of credit confusion out there.
You’ve got questions: How many credit cards should you carry? When should Junior get his own card?
Luckily for you, we’ve got answers.
1. How many credit cards should I have?
Ah, this would be the $64,000 question. Some well-known financial gurus would tell you the answer is none. Meanwhile, other card experts say you can have a lot more. Brian Kelly, the “Points Guy,” says he has up to 20 active accounts open at any given time so he can rack up hotel and airline credits.
However, Adam Levin, co-founder of our partner site Credit.com, suggests a more middle-of-the-road approach. He advises having two cards — a rewards credit card for everyday use and a low-interest card to be used for emergencies.
Why not have just one good all-purpose card? Mainly because you’ll want to earn rewards from your purchases, but airline, gas and cash-back cards tend to have higher interest rates. That’s fine as long as you’re paying off your balance each month.
But when the water heater says “No more” and your savings account says “Yeah, right,” you’ll want a low-interest credit card waiting in the wings. You don’t want to carry a balance on a high-interest rewards card.
2. Should I carry a balance?
Unless you’re self-financing a purchase or dealing with an emergency situation, paying credit card interest is just plain dumb.
Some people believe you need to carry a balance for your credit score to benefit, but that’s not really the case. You can read this article to learn more about why no balance is needed to boost your score.
3. What exactly is my credit score and how is it calculated?
Speaking of credit scores, some people are a little hazy on what they are and how they are calculated.
While several different companies create credit scores, the one most likely to influence your access to credit and interest rates is your FICO score.
Your official FICO score ranges from 300 to 850. This is usually the one companies use to decide how well you manage credit and how likely you are to pay them back after borrowing. The higher the score, the more trustworthy you appear to creditors.
The score is created and weighted with this information:
- Payment history: 35 percent
- Amounts owed: 30 percent
- Length of credit history: 15 percent
- New credit : 10 percent
- Mix of credit types: 10 percent
FICO doesn’t say what constitutes a good or bad credit score. However, typically, if your score is below 600, you’re probably viewed as risky business. A score above 800 will generally get you the best interest rates and terms.
For more information, read our article on credit score fact and fiction.
4. How often should I check my credit score?
Levin suggests looking at your credit score frequently. It’s easy to do, without paying. Here are many sources, including credit cards, banks, credit unions, financial counseling agencies and lenders, where you can get your official FICO score for free.
Once you get a look at that magic number, you may want to take this advice on how to raise your score quickly.
5. I’m ready to ditch my debt. Do I pay off the card with higher interest or a higher balance first?
The answer to this question also rests largely on which financial guru you ask.
Some argue you should start with the smallest balance, only because quickly paying off an account can give you the momentum needed to stick to your debt diet.
However, from a purely financial standpoint, it is better to start with the highest-interest card. Paying off the high-interest card first usually saves the most money.