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?
That depends on whom you ask — and what your financial situation is.
Some financial gurus would tell you the answer is none. Meanwhile, other card experts say you can have a lot more.
Adam Levin, co-founder of our partner site Credit.com, suggests a more middle-of-the-road approach that involves a rewards credit card for everyday use and a low-interest card for emergencies.
Having one all-purpose card is fine as long as you’re paying off your balance each month. But rewards cards tend to have higher interest rates.
When the water heater says “No more” and your bank account says “Yeah, right,” you might want to use a low-interest credit card if you don’t have an emergency fund. You don’t want to carry a balance on a high-interest rewards card.
Still unsure which card is best for you? Looking for a new or better card? Explore the Money Talks News Solutions Center, where you can search various credit cards based on multiple types of rewards and rates.
2. Should I carry a balance?
Unless you must self-finance a purchase or are dealing with an emergency, paying credit card interest is just plain dumb.
Some people believe you need to carry a balance for your credit score to benefit, but as you’ll see in No. 3, that’s not really the case.
3. How is my credit score calculated?
While several companies create credit scores, the ones most likely to influence your access to credit and the interest rates that lenders charge you are your FICO Scores, particularly the one known as FICO Score 8.
The main FICO Scores range from 300 to 850. The higher the score, the more trustworthy you appear to creditors.
These FICO Scores are weighted based on your:
- Payment history: 35 percent
- Amounts owed: 30 percent
- Credit history length: 15 percent
- New credit: 10 percent
- Mix of credit types: 10 percent
For more information, check out “8 Credit Score Myths: Fact vs. Fiction.”
4. How often should I check my credit score?
Credit.com’s Levin suggests looking at your credit score frequently. It’s easy to do, without paying. Start here:
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 will save you money on interest payments. Or as Levin puts it:
“The faster you get the high interest rate down, the more of your dollar actually goes to pay the low-interest balance.”
6. Should I co-sign a card for a friend or family member?
Co-signing for a card or loan puts you on the hook for the balance if the friend or family member stops paying. If the borrower makes late payments — which you may never know — it could also negatively affect your credit score.
You may protest: “But I know that wouldn’t happen. They are really good people!”
Sometimes even good people make poor money decisions, or life takes a turn they didn’t expect.
Bottom line: You shouldn’t co-sign unless you’re ready and able to assume the debt as your own in the event your co-signer — for whatever reason — can’t pay.