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), Chase (JPM), Capital One (COF), Discover (DFS), American Express (AXP) 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.

Best interest rates
One card: Credit cards have different interest rates for different types of transactions, and while you can get a card with a pretty low regular rate, it's unlikely it will also have the longest 0% introductory rate on purchases or the longest 0% balance transfer rate.

Island Approach: Getting different cards for each kind of transaction you need to make allows you to get the lowest interest rates for each. For example, you could get the card that has the longest 0% APR period for purchases as well as the card with the longest 0% balance transfer period.

Conclusion: Don't settle for interest rate mediocrity just to avoid opening another credit card.

Favorable payment allocation
One card: Only the portion of your card payment above the minimum required goes toward your balance with the highest interest rate.

Island Approach: When you have only one type of balance on each of your cards, you can manage your monthly payments strategically so you pay down the balance with the highest interest rate fastest.

Conclusion: You should not carry multiple balances on the same card, as would be the case if you transferred debt to the card you use for everyday expenses. In doing so, you give up control and let your card company prolong the existence of your most expensive debt.

Debt stability
One card: If you are a small-business owner, you might think using a business credit card for all your spending needs is the way to go. CARD Act protections making it illegal for card companies to change the interest rate on your debt unless you are 60 or more days delinquent do not apply to business cards, though.

Island Approach: Pay business expenses with a personal credit card. Use a business card for transactions that will not lead to a monthly balance.

Conclusion: Using multiple credit cards helps provide debt consistency, which is extremely important to any small business, especially considering the current economic climate. Credit card companies are notorious for raising interest rates to raise profits quickly, and you cannot operate a business efficiently under the threat of the suddenly increased cost of your debt.

Final thoughts

Ultimately, the Card Hub Island Approach heightens the clarity with which you view your personal finances. It allows you to quickly and easily assess the responsibility of your spending and evaluate whether you are getting the best rates for each of transaction. Using this approach thereby simplifies personal finance and will help you get free of debt. Once you have done so, you can use the Island Approach to maximize card rewards.

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This article was written by Odysseas Papadimitriou, CEO of CardHub.com, an online marketplace for the best credit cards and the home of the maintenance-free wish list.

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