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Why You Must Use More Than One Credit Card

It's in a credit card company's best interest for you to use a single credit card. Whether you're a customer of Bank of America (BAC - Get Report), Chase (JPM - Get Report), Capital One (COF - Get Report), Discover (DFS - Get Report), American Express (AXP - Get Report) or another issuer, your card provider would prefer you to use only one credit card for two reasons: It ensures this company will have all your business and allows it to maximize the profitability of whatever debt you have.

To issuers, one multipurpose card means higher average monthly balances and favorable payment allocation. As you might have guessed, it's not in your best interest to use one credit card, though. In fact, using multiple credit cards helps you lower the cost of your debt and escape debt for good.

The Island Approach to credit isolates different types of transactions and balances on different credit cards, like they are on islands.

So how does one know the right number of credit cards to get? Just follow the Island Approach.

The Island Approach, built on the concept of compartmentalization, suggests you open a different credit card for each of your different personal finance needs. It's called the Island Approach because, in using it, you isolate different types of transactions and balances on their own cards, like they are on islands. The benefits of this approach are fivefold: it lowers your finance charges, allows you to get the lowest interest rates, fosters debt stability, helps you strategically allocate payments and teaches you to spend within your means.

This is obvious when you compare the use of one card vs. the Island Approach.

Responsible spending and lower finance charges
One card: When you use the same card to make purchases and revolve debt, it's tough to evaluate everyday spending. Your monthly expenses simply get lost among your debt and you may not be able to tell whether your lifestyle exceeds your means. You also owe more in interest because your interest rate gets applied to your debt and expenses.

Island Approach: Use one credit card for everyday spending that you pay for in full, and another to carry debt.

Conclusion: Implementing a system where you pay down your everyday purchases in full each month instills discipline and serves as a benchmark for your fiscal responsibility. When you fall into a routine of paying for your purchases in full, not being able to do so one month will be a warning sign your spending is becoming risky. It also lowers the cost of your debt by lowering your average monthly balance; since you pay for what you charge in your everyday credit card each month, you never revolve a balance on it, and finance charges are applied only to the debt on your other card.
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AXP $65.86 -0.56%
BAC $14.80 -1.50%
COF $73.36 -1.30%
DFS $56.68 -0.86%
JPM $63.63 -0.75%


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