Effects of Multiple Credit Cards on Credit Score

Using multiple credit cards strategically can be a powerful method to improve your CIBIL score.  You can leverage multiple credit cards to improve your credit utilisation ratio, payment history, and credit mix. All of these factors are taken into consideration when calculating your CIBIL score. Let’s understand how to utilise multiple credit cards to build a strong credit history in further detail.

There are no legal limitations to how many credit cards you can have. However, different lenders may have their own limits based on your creditworthiness. In the case of multiple cards, each card is typically utilised for a specific purpose. This can make managing different types of expenses easy while also enabling you to build your credit score effectively. 

 

Having multiple cards can also increase your overall credit limit (borrowing capacity). When a high credit limit is managed responsibly, it can positively impact your credit utilisation ratio. This ensures you have easy access to additional funds whenever required. However, it's crucial to remember that each card comes with its own set of responsibilities, including managing payments and the risk of overspending. Thus, it is important to know about the pros and cons of having multiple credit cards.

Some benefits of opting for multiple credit cards that you should know about are as follows:

• Higher combined credit limits increase your purchasing power

• Managing spending across multiple cards can lower your overall credit utilisation ratio 

• Different cards offer varying rewards programs, maximising potential cashback, points, or miles

• Multiple cards contribute to a broader credit history, which can positively impact your score

• Multiple cards can be useful for different types of purchases or budgeting, leading to more flexibility and convenience

Before you decide to get multiple credit cards, it is important to ensure that you understand its possible limitations and challenges:

• Managing multiple cards can be challenging and may lead to overspending and debt accumulation

• Keeping up with multiple due dates and payments can be overwhelming and increase the risk of missed payments

• Annual fees, late payment fees, and other charges can add up across multiple cards, leading to increased overall costs

• Late payments, high credit utilisation, or maxing out cards can significantly damage your credit

• Managing multiple accounts, rewards programs, and varying interest rates can be complex and tedious

Managing multiple credit lines responsibly can positively impact your creditworthiness. However, it's crucial to understand how credit scoring works and the impact that the use of credit cards can have on your score, both positively and negatively.

Payment History 

Consistently paying your bills on time across multiple credit cards demonstrates excellent financial discipline and leads to a positive payment history. This is the most crucial factor for a good CIBIL score. Each on-time payment on each card contributes positively.

 

Conversely, managing multiple cards increases the risk of missed payments. Forgetting due dates, especially with varying amounts and interest rates across different cards, can lead to late payment reporting, severely damaging your CIBIL score. Even one missed payment can have a significant negative impact.

Credit Utilisation Ratio 

Multiple cards offer the potential to significantly improve your credit utilisation. By distributing your spending across several cards, you can keep the utilisation on each individual card, and your overall utilisation, low. For example, if you spend ₹20,000 monthly, using two cards with ₹50,000 limits each (₹10,000 per card), it results in a 20% utilisation, which is considered to be great. This demonstrates responsible credit management to lenders.

 

The availability of more credit can entice you to overspend. Carrying high balances on multiple cards, even if your overall utilisation seems reasonable, can be perceived negatively. Lenders look at both your overall utilisation and the utilisation on individual cards. Maxing out or even approaching the limit on one or more cards, even if you have other cards with low balances, can affect your score.

Credit History Length 

Opening and responsibly managing multiple credit cards over time can contribute to a longer credit history. However, simply having multiple cards doesn't automatically lengthen your history. The age of your oldest account is the most significant factor. Adding new cards doesn't significantly impact this in the short term.

 

Opening many new cards in a short period can temporarily impact your average account age, which might slightly lower your score. However, this effect is usually short-lived and less significant than the impact of payment history and utilisation.

Credit Mix

Multiple credit cards contribute to a more diverse credit mix, especially if you have other types of credit, such as a personal loan, home loan, or auto loan. This demonstrates that you can manage various forms of credit responsibly.

 

Simply having multiple credit cards doesn't automatically guarantee a positive credit mix impact. The type of credit matters more than the number of cards.

New Credit 

Each time you apply for a credit card, the lender makes a credit inquiry, which can slightly lower your score. Applying for multiple cards within a short period can lead to multiple inquiries, which can have a more noticeable, though still temporary, negative impact. This is generally less of a concern than the other factors but should be considered.

Managing multiple credit cards can boost your CIBIL score if done responsibly, primarily by improving your credit utilisation and payment history.  However, it also carries the risk of increased debt and missed payments, which can negatively impact your score. So, careful planning and disciplined financial habits are essential for leveraging multiple cards effectively.