James Baigrie
Q. I'm tempted to open a lot of store cards around the holidays to take advantage of discounts. Will that affect my credit score?
A. Yes. Every new application results in a credit-report inquiry. Each inquiry typically causes your score to drop by up to five points. And the lower your score, the less attractive you become to lenders when you apply for credit, a loan, or a mortgage. (Your score will rebound if your bill-paying record is good and you don't apply for more cards.) Be choosy about opening new cards. Consider how much the holiday discount will save and whether you'll be able to pay the bill in full. Store cards typically charge higher interest rates (sometimes more than 20 percent), so carrying a balance can eat up any initial savings. Get Tips for Saving Money All Year Long from Real Simple.
Q. How many credit cards are too many? And is there such a thing as too few?
A. Many experts recommend having no more than three or four cards. "When people have too many, they tend not to keep track," says Howard Dvorkin, the founder of Consolidated Credit Counseling Services and the author of Credit Check: How to Dig Out of Debt (Wiley, $20, www.amazon.com). Having too many cards can also make you look credit-hungry, which could hurt you if you apply for credit you really need. Since no card is accepted universally, you'll want one or two of the major cards, plus a charge-only card (the balance must always be paid in full) and a store card if you shop somewhere regularly.
Q. What should I consider when weighing a card with mileage points or other incentives against another card?
A. People love the thought of racking up points, but the points are worthless if you don't use them. Before signing up for a rewards card, check the limits of the program. Some restrict the stores where you can shop and receive points; others cap the number of points you can accumulate. Look at the interest rate, too, since rewards cards often carry higher rates and, occasionally, fees. Your best bet is to keep a rewards card for smaller, everyday purchases that you'll pay off in full each month and a low-interest card in case you need to carry a balance. Learn how to Spend Money to Save Money.
Q. Is it better to keep a big balance on one card or spread the balances over several cards?
A. You're usually better off keeping smaller balances on a few cards. "If you have just one card and it's almost maxed out, that suggests (to your bank and other potential lenders) that you're having trouble getting credit," says Robert D. Manning, Ph.D., director of the Center for Consumer Financial Services, at the Rochester Institute of Technology, in New York. The exception? If one card has a particularly low interest rate, you might want to switch all your balances to that one to save money.
Q. What should I do with cards that I don't use? Should I leave them open or close them?
A. Close the account and destroy the card. That's the safest way to avoid fraud and identity theft. But first there are factors to weigh. Best case: You should be using no more than half your available credit at any time, because your debt-to-available credit ratio accounts for about 30 percent of your credit score. If this ratio would be affected, you may be better off keeping the account open until you've paid off your debt. A lengthy credit history also bolsters your credit score, so if you decide to purge some cards, "cancel in order of the newest card first," advises Robert D. Manning, Ph.D., director of the Center for Consumer Financial Services, at the Rochester Institute of Technology, in New York.
More Credit Questions, Answered
Don't Miss:
20 Ways to Save During the Holidays
Save Money All Year Long
How Do You Stay on a Budget?
