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Having multiple rewards credit cards in rotation gives you the opportunity to maximize your earnings on every purchase you make. Many of these cards also offer perks that can add value to your lifestyle.
But opening multiple credit cards can impact your credit, both negatively and positively. If you're considering adding a few credit cards to your wallet, here's what you need to know.
How Does Opening Multiple Credit Cards Impact My Credit?
Virtually every time you apply for credit, the lender will check one or more of your credit reports and may review your credit score. This process helps them assess how you've managed credit in the past and determine whether to approve your application.
Credit checks associated with applications for credit typically result in what's called a hard inquiry appearing on your credit report. In general, an additional hard inquiry on your credit report won't impact your credit score much—according to FICO®, you can expect to see your score drop by fewer than five points.
If you apply for multiple credit cards at the same time or in short succession, however, the negative impact can be compounded and hurt your score more. This is primarily due to the fact that applying for multiple credit accounts in a short period raises your risk as a borrower in the eyes of creditors. As a result, it's best to space out your credit card applications and avoid unnecessary inquiries to avoid putting yourself in a difficult position.
Opening a new credit card can also impact your credit score if it lowers your credit utilization rate. This rate is calculated by adding up your credit card balances and dividing that figure by your total available credit across all your cards. A high utilization rate can hurt your credit. But if you add to your available credit without increasing your balances, your utilization rate will go down, which can help improve your credit score.
Another way your credit score can be impacted is the new account's effect on the length of your credit history. One of the factors in credit score calculations considers how long you've had credit as well as the average age of your credit accounts. New accounts can bring down this average, which can potentially have a (small) effect on your scores.
Things to Keep in Mind Before Applying for Rewards Cards
There are several different types of rewards credit cards, and each one has its own set of benefits and features. Here are some things to think about while you're shopping around for the right one:
- What types of rewards are offered? Credit card rewards are categorized into three general buckets: cash back, points and miles. Within those categories, though, are different types of rewards structures and rates. Think about what you want out of your new card, whether it's airline miles, hotel points, general travel rewards or simple cash back. In some cases, it may be good to have a mix of different types to maximize your rewards.
- Will you be able to maximize rewards? The best way to maximize credit card rewards is to find cards with rewards programs that mesh well with one another. For example, if two of your top spending categories are gas and groceries, it's easy to find a card that offers a bonus rewards rate (3% is common) on spending in those categories. For example, the Blue Cash Everyday® Card from American Express earns 3% on U.S. supermarket spending up to $6,000 annually (1% cash back once the cap is reached), and 2% cash back on spending at U.S. gas stations and select U.S. department stores. In most cases, though, rewards cards will give you just 1% back on spending that doesn't fit into a bonus category, or once you've reached its spending limit. Pairing the card with one that has a 2% base rewards rate, ensures that you'll always earn at least 2% back on your purchases (the Citi® Double Cash Card - 18 month BT offer from our partner could fit the bill).
- Is there an annual fee? There's nothing wrong with getting a credit card with an annual fee. If you're generally fee-averse, you may be inclined to limit your search to no-annual-fee credit cards. As you do your research, however, be sure to compare each card's benefits and how they relate to any potential annual costs. In many cases, you can get far more value every year than what you're paying in annual fee costs, even compared with a similar card with no fee.
- When do rewards expire? In many cases, your rewards won't expire as long as your account is open and in good standing. There are some exceptions, though, especially among airline and hotel credit cards. Even with these, though, you can usually keep your rewards from expiring when you earn or redeem new points or miles. Regardless, it's a good idea to know how long you might have to use your rewards to make sure you don't forfeit them.
How to Choose the Best Rewards Card
There's no single best rewards credit card out there for everyone, so it's important to know what you want. Here are three factors to consider as you shop around:
- Credit score: Most of the best rewards cards are reserved for folks with good or excellent credit. According to FICO®, this starts at a score of 670, but card issuers may prefer applicants to have a score of 700 or above—or possibly even higher for the cards with the most perks and benefits. If your credit score isn't where it needs to be for the card you want, consider taking some time to improve it before you apply.
- Spending habits: Again, maximizing rewards requires you to pick cards that give you the most value on your biggest spending categories. Write down your expenses from the past few months to get an idea of where most of your money goes. This will help you find the cards that are best tailored to how you plan to use them.
- Lifestyle: Some credit cards also offer other benefits that can make it easier to have the lifestyle you want. For example, many travel credit cards offer various travel- and dining-related benefits that can save you money. Some premium travel cards even go so far as offering airport lounge access, elite status and more.
How to Responsibly Use Credit Cards
There's nothing wrong with using credit cards to meet your rewards goals. But it's crucial that you develop good credit habits to avoid the dangers credit cards can pose. Here are some ways to use your cards responsibly:
- Use a budget. Credit cards make it easy to carry a balance from month to month. But if you're working with a budget, it'll be easier to avoid spending money you don't have.
- Pay on time and in full. Credit cards charge relatively high interest rates. But if you pay your monthly bill by your due date every month, you don't have to worry about interest charges at all. Consider setting up automatic payments to avoid missing one.
- Keep your balances low. Again, your credit utilization is an important factor in your credit score. Some experts recommend keeping it below 30%, but there's no hard-and-fast rule. The lower it is, the better. You can keep your utilization rate low by making multiple payments throughout the month or using a mix of credit cards, your debit card and cash to avoid racking up a high balance.
Your Credit Is Key to Enjoying the Best Credit Cards
Whether you're thinking of applying for a new credit card now or at some point in the future, it's critical that you maintain a good credit score to improve your chances of getting the card you want.
Check your credit score to know where you stand, and consider also reviewing your credit report to see if there are areas that you need to address. The process of improving credit can take time. But with credit cards, the reward is having a wider selection of options from which to choose.