NEW YORK (MainStreet) Consumers who only have one credit card are doing themselves a disservice, several experts said.
When you obtain a credit card from a credit card company, bank or financial services company, you are agreeing to their terms which often state that the company has the right to change them at any time.
The issuer can opt to increase your current interest rate or APR, lower your credit limit, increase the annual fee or even cut you off completely, depending on your past payment history, said Jeff Golding, CEO of WilliamPaid, a Chicago-based company which allows people to build credit through paying their rent online for free.
Also See: The 1 Credit Card Life
And so while having just one credit card may help you budget more easily or halt any spur of the moment purchases, it can affect your credit score negatively by impacting your credit utilization ratio.
Also See: 5 Ways Your Credit Card Is Ruining Your credit
The credit utilization ratio shows how much of your available credit is being used and maintaining one between 10% to 30% is optimal, he said. While 10% is ideal, 30% is still pretty respectable.
The ratio is determined by the total amount of credit you could borrow and how much you have already spent. If you have two or more credit cards and your credit limit is a total of $10,000 and your balance is only 2,000%, then your ratio is 20%. However, if you only had one credit card with a limit of $5,000 and you spend $500 for an airline ticket and a hotel, your ratio has already reached 10%.
"Credit is your asset when used responsibly and carrying a single credit card can limit your access to capital when you 'need' it most," Golding said. "Having multiple accounts can make you 'look' more responsible to future creditors even if you don't often use those accounts. The more credit you prove you can handle responsibly, the lower risk you become to creditors, thus typically represented in a higher credit score."
Maintaining a high balance can be risky even if each month you pay off a $4,000 balance on a card that has a limit of $5,000, because your ratio is at 80%, he said. This can impact your credit report negatively, because your credit score is a snapshot of your payment history. Depending on when a new creditor checks your credit report, the updated balance may or may not be reflected.
"Your credit score does not adjust on a daily basis and is just an indicator for companies to assess risk and see how well you manage your debt," he said.
One option is to have additional credit cards open that do not require an annual fee, so that you are not stuck in a bind in case of an emergency or if the issuer decides to raise the interest rate. A higher APR means your minimum monthly payments will increase and it will take you longer to pay off your debt.
Waiting until your issuer changes the terms to get another credit card may not be a solution because the terms may not be as good and you already have a blemish on your credit history, Golding said.
"You miss one payment, and it has an impact on your credit score since roughly 35% of your credit score is based on your payment history," he said. "Your income or other assets are not factored into your credit score."
Having a backup card that you don't use frequently is often handy in case your main credit card is compromised by hackers, which is becoming increasingly more common. If you have bills that are auto-billed, just having one card could put you in a bad position if you have bills that are due soon.
Issuers examine your spending history, and very small and large purchases can trigger a freeze on your account, especially from online shopping, Golding said.
"The issuers can freeze your account for fraud purposes," he said. "If that's your only card, then the company will have to verify a purchase or you can be in a situation where you don't have a card."
Having several credit cards can be tricky and difficult for consumers who are already accruing too much debt, said Gail Cunningham, spokesperson for the National Foundation for Credit Counseling. "My only concern would be a consumer having too much of a good thing," she said. "A wallet full of plastic can equal a wallet full of temptation, as more credit equals more ability to spend. We've all seen people at the checkout counter who pull out a second credit card without blinking when the first one is rejected. If a person has a history of irresponsibly managing credit, I suggest having no more than two cards and should protect them from piling up too much debt."
--Written by Ellen Chang for MainStreet