Smart Money Podcast: Money Hot Takes, and Too Many Credit Cards

Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions.

This week’s episode starts with two hot takes from our hosts about buy now, pay later loans and credit reports.

Then we pivot to this week’s money question from Lauren, who left this voicemail:

“Hi. My name is Lauren, and I’m interested in getting into the credit card game. My question is, is there too many credit cards that one person can have? And if I wanted to open more, should I open them all at once or space it out? Currently I have two credit cards, one from college, which was my first, and the second that I opened about a year ago for better points. However, neither are super awesome. They’re both free, don’t have an annual payment. I’ve never had a problem with credit card debt. I’ve never even actually had credit card debt, and I pay both off in full every month. So I want to get some more credit cards from what I’ve seen on Instagram and TikTok to help get the full benefit of the money that I’m spending. But I don’t know how many credit cards is too many to have and how it’ll affect my credit score. Hopefully you guys can help me out.”

Check out this episode on any of these platforms:

Co-host Sean Pyles’ hot take is about buy now, pay later — or BNLP — loans. Though they are typically easy to be approved for and don’t charge interest or late fees, Sean says that those features encourage overspending. The relative accessibility of BNLP loans may also cause consumers to take on several at one time, which can be difficult to keep track of. Sean recommends using a cash-back credit card for purchases instead.

Co-host Liz Weston’s hot take is about credit reports. Everyone has always been able to access their credit report for free once a year by going to AnnualCreditReport.com; however, the COVID pandemic prompted the three national credit bureaus to give us free weekly access to our credit reports through 2023. Liz advocates for this change to be made permanent. She also reminds listeners to make sure they are going to the correct website, AnnualCreditReport.com, rather than to another one that charges you for your credit report.

How many credit cards is too many? That answer depends on your ability to responsibly manage multiple accounts. Credit card issuers are not bound by any laws that limit the number of cards that any one consumer can have, so it’s up to you to determine where to draw the line.

Whether you have one credit card or 50, take some time to establish a system that helps you keep up with due dates, spending limits and rewards. Most issuers allow you to set up alerts that notify you of upcoming bills or when you’ve overspent in a certain category. Familiarize yourself with the card’s rewards structure, if any, and spend strategically.

An example: Say you have two credit cards, one that earns a flat 2% cash back on every purchase and another that offers 3% on gas and 1% on everything else. You’ll save more if you remember to use that second card at every fill-up.

Those who want multiple credit cards should know that applying for several cards at one time can lower your credit score — and your approval odds. Each credit application initiates a hard inquiry into your credit report, which usually hurts your score. And multiple applications within a short time may cause the underwriters to question your need for so many lines of credit. In general, NerdWallet recommends spacing out credit applications by three to six months.

If you feel that you have accumulated too many cards and want to downsize, it’s probably best to store extra cards somewhere safe or request a product change rather than closing the accounts. Canceling credit cards can increase your utilization ratio, which is the percentage of your total credit in use; lenders prefer utilization rates below 30%. They also like to see a history of responsible credit use, so hanging on to a card you’ve managed successfully for years means your credit report will reflect all that hard work.

• Go slow and strategize. More credit cards can be a good thing, but have a plan. Make sure you can manage adding one new card to your stable before you layer in more.

• Find the right card for you. Shop around for a credit card that suits your spending habits and goals.

• Use credit cards responsibly. Make payments on time and try to avoid paying interest, which eats away at the value of the rewards you’re earning.

More about credit cards on NerdWallet:

Liz Weston: Credit cards can protect you from fraud and get you oodles of points or miles. But can there be too much of a good thing? In this episode, we tell you when you might have too many credit cards.

Sean Pyles: Welcome to the NerdWallet Smart Money Podcast, where you send us your money questions and we answer them with the help of our genius Nerds. I’m Sean Pyles.

Liz Weston: And I’m Liz Weston. If you want the Nerds to answer your money question, call or text us on the Nerd hotline at 901-730-6373. That’s 901-730-NERD, or email us at [email protected]

Sean Pyles: Being a podcast, we really want to hear from as many of you as possible, so please send us a voicemail or a voice memo. It’s always so great to hear your voices.

Sean Pyles: Also subscribe to get new episodes in your feed every Monday. And if you like what you hear, please leave us a review and tell a friend.

Liz Weston: In this episode, we answer a listener’s question about whether you can have too many credit cards and what to do about it if you do. Stick around to the end of the episode to hear our takeaway tips for managing your credit cards.

Sean Pyles: Before we get into that, though, Liz and I are going to do something new on the podcast. We’re going to give you our money hot takes, where we rail against something that we just don’t like in the personal finance space.

Liz Weston: And why are we doing this, Sean?

Sean Pyles: Because personal finance can be really tricky to navigate for a lot of people. There are so many products to keep track of, and some can help you meet your life goals, and others can drain you of your money and make life harder. This latter category makes me mad, so I want to talk about it.

Liz Weston: All right. Well, kick us off. Tell us what your money hot take is.

Sean Pyles: Sure. Before I get into it, quick disclaimer, this is just my point of view. It does not necessarily reflect the views of others at NerdWallet or even on this podcast right now.

My view, my money hot take is that buy now, pay later products are garbage. A little hyperbolic, but let me explain.

Sean Pyles: So first off, I’ll talk about what these loans are. Buy now, pay later products are short-term installment loans that some vendors offer as a payment option at checkout. You’ve probably seen these when you’re shopping around online. These credit products break up purchases typically between $50 and $1,000 into four payments, so it sounds like a really handy way to purchase whatever you want online. They’re super easy to get approved for. More than 70% of applicants were approved for their buy now, pay later loan in 2021, which is kind of incredible. Also, adoption of these buy now, pay later products has exploded in recent years. Between 2019 and 2021, the use of these products grew by 970%, according to the Consumer Financial Protection Bureau.

Liz Weston: Wow. But they don’t typically charge interest, right? So what’s so bad about buy now, pay later?

Sean Pyles: Right. They’re not all bad. Many do not charge interest and some don’t even charge late fees. Sure, they can be more accessible for some people than credit cards, and also the lack of an interest rate can make it a really affordable way to break up the bigger expense that you have. And I get it. Sometimes you just need some credit to cover a purchase.

But I’m not a fan of them because some of the benefits can also make them risky. I’m not really one to finger wag typically about what people are doing with their money. We’re all adults here, or we should be if we’re listening to this podcast. But these products can prey on consumers’ worst shopping habits without much payoff. Because in part, most buy now, pay later purchases are made for what we would probably call wants or discretionary purchases. Over 58% of these products were used for apparel and beauty merchants in 2021, according to the Consumer Financial Protection Bureau. So not things you really need typically to break up over four to six weeks.

Liz Weston: I imagine that keeping track of them can be a little bit challenging if you have more than one or two.

Sean Pyles: Yeah, that’s also an issue with these, because it’s so easy to stack up multiple buy now, pay later loans, and then you load up on debt that you can’t really afford. On top of that, it can be difficult to keep track of the due date for all of these various loans that you have.

Earlier we talked about how these loans don’t have interest. I think it’s important for folks to realize that in this world nothing is really free. Part of the reason why you are not charged interest on these products typically is because buy now, pay later lenders have partners with the merchants that you’re shopping through, and these merchants are relying on you to overspend on stuff you likely don’t need in the first place.

For example, one buy now, pay later lender reported that their average order value or how much people are purchasing at one time is 85% higher than other payment methods. So people are buying a lot more of the stuff that they don’t really need because it’s so accessible to fund it through these loan options.

Liz Weston: Well, I’ve always thought of it as an alternative to credit cards, because you charge on your credit card and you pay it off a month later. But I can see where if you get a bunch of these, it can be really hard to keep track of. And if you do have that mindset, that, “Well, I can’t afford it now, but I’ll pay it off in a few payments,” that’s a slippery slope, because if you are buying more than you need to, you’re winding up hurting yourself financially.

Sean Pyles: It’s unaffordable for a lot of people to continue to do things like this. Again, going back to the idea of having multiple loans like this, it can be really hard to keep track of. And around 10% of borrowers were actually charged at least one late fee in 2021.

We do compare these often with credit cards, but there’s one big difference between credit cards and buy now, pay later loans. Not all buy now, pay later companies report on time payments to the credit bureaus. So if you’re using one of these products because you can’t actually qualify for a good credit card, you don’t have great credit, these loans are most likely not going to help you fix that issue.

Liz Weston: So what are some better alternatives?

Sean Pyles: OK, I’m just going to say, there’s nothing wrong with a reliable cash back credit card. That is my go-to for shopping online. My credit card actually will offer me up to 6% cash back at select merchants, which is great. Something that people may not know is that many credit card companies actually offer buy now, pay later plans and have for quite a long time. So you can look at your own credit card company and see if they do offer that as something that you’re interested in. But I’m also going to say something that might be boring but reliable. There is nothing wrong with simply saving up for your purchase, delaying gratification a little bit, especially if it’s a discretionary expense.

Liz Weston: Yeah. Typically you don’t want to be borrowing money for something that doesn’t increase in value.

Like, borrowing money to buy a house, that makes a lot of sense, or to invest in a business or get an education. All of those things can increase your wealth over time. When it comes to day-to-day purchases, yeah, the money should probably be in your checking account if at all possible.

Sean Pyles: Yeah, ideally. We realize that, again, this is not easy for a lot of people to do, but if you can put off buying whatever it is you’re wanting that day for a little bit so you can save up and buy it outright, that’s probably the better way to do it, especially if you’re using a credit card that’s getting you points to do so.

Liz Weston: Yes. Are you still paying off your credit cards every week?

Sean Pyles: I do that actually multiple times a week.

Sean Pyles: Because I just don’t like carrying a balance. It’s a weird neurotic thing that’s a hold over from when I had credit card debt years and years ago. I just like seeing that zero balance. It makes me feel like I’m being super-responsible. Not everyone needs to do that or would want to, but that’s how I operate.

Liz Weston: Yeah, and a lot of people don’t even realize that’s an option. You can make more than one payment a month.

Sean Pyles: Yeah, it’s kind of a psychological trick. It makes me feel like I’m not spending as much as I am. Even though I have my budget, I know where my money is going, I just like feeling like I’m not racking up a big balance.

Liz Weston: Yeah, and that way you don’t have an unpleasant surprise when the bill comes.

Sean Pyles: Yep. OK. Well, Liz, what is your hot take?

Liz Weston: So recently the three credit bureaus announced that they were going to extend the free weekly access to our credit reports. We’ve had that basically since the beginning of the pandemic.

So to reel back a bit, there is a federal law that says you have free access to your credit reports once a year. Through that they created AnnualCreditReport.com, which is the site where you can access these free credit reports. When the pandemic came along and everybody was having some really interesting financial times, the credit bureaus decided, OK, we’re going to give you free weekly access, and that’s been great. And now they’re saying, OK, that’s going to extend through the end of 2023.

My hot take is, it is our data, people. We should have access to it, period.

So I would really like to see what started as a COVID measure just be extended indefinitely. Just give us access to our data. While I’m on this rant, the site itself, AnnualCreditReport.com, so many issues with that. I hear from people constantly that they have tried to go get their free annual credit reports and got charged. What’s happening is, they’re putting in “annual credit report.com” or “annual credit report” to the search engines and getting a bunch of ads and clicking on the first ad.

Sean Pyles: There are a lot of duplicate websites out there.

Liz Weston: So many lookalike sites, and many of them are run by the credit bureaus. That’s where I really get cranky, because they are making money off of people’s confusion. They’re trying to get you to sign up for credit monitoring, which is not something that most people really need.

Sean Pyles: If I’m being cynical, I would maybe say that the reason they want to end this free weekly access to your credit report December 2023 is because they want to make you pay for access to your own data.

Liz Weston: Well, that’s generally, yes, that is the business model. These are three private companies that are making money from your data by selling it to lenders and landlords and everybody else that wants to take a look at it. If they can make some money off us as they go along, that’s great.

I think what they’re doing is experimenting with this idea of making it free going forward indefinitely. I hope that’s the case, but I really would like it to be just said right now, “This is your data. You have access to it.”

Because if people don’t have regular access to it or if they have to pay for access, that really puts them at a disadvantage. If there’s a problem with your credit report, and keep in mind your credit report is what’s used to create your all-important credit scores, if there’s a problem with that data, if you have to pay to find out what’s going on, you are likely to put that off, or something could really be developing under the surface and you would not know about it.

So I think not enough people are taking advantage of this to start. We should have more people looking at their credit reports regularly, but we certainly don’t want to discourage anybody who’s doing it by putting a fee in place.

Sean Pyles: So it seems like you think one great solution would be to have free access across the board to this information for everyone.

Liz Weston: Yeah, basically. I don’t think anybody should be charged for looking at their own data. Also, let’s get some better SEO out there, because there’s two problems with this. One is that some of the credit bureaus are better than others about search engine optimization. That’s what SEO is. So that if you do type in “annual credit report.com,” the results will come up. But the search engines themselves are letting people buy ads that get in the way of the official site. I would just love to see that official site pinned to the top of any search that looks anything like “annual credit report.com,” “free credit report.com,” whatever, so that the very first result people get is the official site, it’s clearly labeled so that people know where they’re going, and they don’t get sucked into these lookalike sites.

In general, if you’re being asked for a credit card to get access to your credit information, you’re on the wrong site. You’ve gone astray somewhere. When you go to the real site, AnnualCreditReport.com, and by the way, just type that into your browser bar so you’re not going through search engines at all. But if you go to the real site, you are not going to be asked for a credit card to get access to your credit reports.

Sean Pyles: That’s key because even going to one of the websites of the main credit bureaus, if you try to get your credit report through their website, sometimes they will try to charge you, so you can’t even trust the main bureaus. You have to go to AnnualCreditReport.com to get that for free.

Liz Weston: Yes. Then eventually, let’s change the name, “free credit report.com,” or something that’s a little bit more accurate for what the situation is now.

Sean Pyles: Right. We need some improvements to the user experience here.

Liz Weston: Yes, definitely.

Sean Pyles: Well, thank you for sharing your money hot take. That was kind of cathartic.

Liz Weston: And likewise. I feel better now. Thank you.

Liz Weston: OK, let’s get onto this week’s money question.

Liz Weston: This episode’s money question comes from Lauren, who left us a voice-mail. Here it is.

Lauren: Hi. My name is Lauren, and I’m interested in getting into the credit card game. My question is, is there too many credit cards that one person can have? And if I wanted to open more, should I open them all at once or space it out? Currently I have two credit cards, one from college, which was my first, and the second that I opened about a year ago for better points. However, neither are super awesome. They’re both free, don’t have an annual payment. I’ve never had a problem with credit card debt. I’ve never even actually had credit card debt, and I pay both off in full every month. So I want to get some more credit cards, from what I’ve seen on Instagram and TikTok, to help get the full benefit of the money that I’m spending. But I don’t know how many credit cards is too many to have and how it’ll affect my credit score. Hopefully you guys can help me out. Thank you so much. Bye-bye.

Sean Pyles: To help us answer Lauren’s question on this episode of the podcast, we are joined by our occasional co-host, Sara Rathner.

Sara Rathner: Hey, I’m happy to find out I’m a genius Nerd apparently.

Sean Pyles: I think we’ve known it all along.

Sara Rathner: Did you gently promote everyone you have on this podcast to a genius? I love it.

Sean Pyles: I looked around and I realized I’m surrounded by geniuses, and so I changed the intro.

Sara Rathner: Aw. That’s so nice.

Sean Pyles: Well, I guess this would be the true test of your level of genius. Let’s get your help answering Lauren’s question. To start, do you think there is such a thing as too many credit cards?

Sara Rathner: I don’t. So OK, whenever somebody asks me a money question, 90% of the time my answer is, “It depends,” shrug emoji. I know that’s so frustrating to the people who are asking me a question, because they just want a direct answer, and then they can take the answer and take action with it. But you really want to evaluate what’s going on for you specifically.

So with credit cards, theoretically, there’s no hard limit that’s imposed upon people by credit card issuers. There’s no law, there’s no industry standard that says if you have more than X number of cards, you have too many cards, we’re cutting you off. That doesn’t exist. So in reality, there are restrictions that are placed on credit card holders, because when banks evaluate your credit card application, part of what they’re evaluating is, “What is the likelihood you’ll pay us back?” Because they don’t want to lend money to people that they worry will not pay them back, or they will, but they’ll give them really terrible terms, like a high interest rate.

So a lot of times you’ll see, if you do have many credit cards and you apply for another one, you might butt up against a limit around whether or not you can qualify for the card even if you have excellent credit. I have been rejected for cards because I have too many recent inquiries or too much credit, basically, even though I have excellent credit, not to brag. That could be a limitation. Issuers might see what you already have and say, “Nah, you got too much. No thank you.”

But also sometimes you’ll see limits around sign up bonuses, which are very attractive reasons to get a card, but you might have a card where you have the card once you earn the bonus, you use the card for a little while, maybe you cancel it eventually, and then a few years later you want to get the same card again because the bonus is really attractive, but some issuers have the rule where you can’t qualify for a second bonus on the same card if you’ve had it, things like that.

Liz Weston: And sometimes the issuer will let you move your credit around.

Sara Rathner: Yeah, you call what’s called the reconsideration line, and this is something I’ve done as well and people I know have done this. Maybe you were turned down when you apply for a card because they say you have too much credit with us already, because maybe you have multiple cards from that same bank. You can call them and say, “Hey, I have an awfully high credit limit with this one card. I don’t need such a high limit. Can I take half of it and apply it to this new card? And so I have the exact same amount of credit with your bank, but it’s just spread out over the number of cards I had before plus one.” Oftentimes they will say yes to that. It is worth asking. If they say no, they say no, but at least you tried.

Sean Pyles: OK, so just to be totally clear here, to answer Lauren’s question of, is there such a thing as too many credit cards, the answer is essentially no, but you have to insert your own personal context for how many cards you would want, and then also realize that credit card companies aren’t just going to give you every single credit card that they have.

Sara Rathner: Right. And not only are credit card companies a potential limitation for you, but also you are a potential limitation for you. How many cards can you comfortably manage, make on time payments — in full if you can, because credit card debt is expensive. If you are struggling to remember payment due dates, if you’re struggling to remember which card to use when, if you’re just kind of frustrated by it, it’s a sign that you have bitten off more than you can chew. It is totally fine to have one credit card and use it for everything. It’s totally fine.

We write about credit cards for a living. Me and a lot of my colleagues on the credit cards team have multiple cards that we use for different purposes, but this is our job. So this is something that we’re marinating in all day, every day. I know plenty of people who find that confusing and off-putting, and that’s OK. You could just have one card that you use all the time.

Liz Weston: I remember being blown away by talking to a credit card Nerd early on, right after I started working for NerdWallet, and he used a single cash back card. I was like, “I didn’t know that was allowed, you could be a credit card Nerd and do that,” but he basically said his life is too busy, he had kids, he had too much going on. The cash back card made it simple, and that’s the way that he wanted to go.

Sean Pyles: Yeah. Sometimes optimizing your credit cards is all about optimizing it for your own lifestyle. You don’t have to squeeze as many points out of every transaction as possible, because that can get exhausting.

Sara Rathner: Yeah, and there’s definitely a community out there of travel hackers and card jugglers, and a lot of that is aspirational. It’s as aspirational as a fashion magazine or some sort of Instagram profile where somebody travels all the time. For many people, that’s just not realistic, because you’re a busy person, you’ve got other stuff going on, you need to streamline the systems in your life. Part of that is streamlining your credit cards and your other financial accounts.

So if you are struggling to keep up and you feel pressure, “Well, my friend travels on points, so I have to travel on points, too.” No, you don’t. You don’t have to do anything your friends do, OK? You have to manage your money in a way that allows you to meet your goals, allows you to grow as a person. If that means managing multiple credit cards and traveling on points, great. If that means having one or two cash back cards and getting a couple percent back on groceries and gas, great, do that. You have my blanket permission, for what it’s worth anyway.

Sean Pyles: That said, it does seem like our listener wants to expand their portfolio of credit cards, and they will have to learn how to manage multiple cards at the same time. So I’m just going to ask both of you two, how many cards do you have and how do you manage them?

Sara Rathner: I think …

Sean Pyles: Putting you on the spot here.

Sara Rathner: Probably eight, but I only use three or four of them in regular rotation. So I leave the other ones open just to keep my credit history long. There are people that I know who have more, so I’m probably on the more conservative side of having a lot of credit cards.

Liz Weston: I literally have a leather portfolio, and it’s filled with credit cards. So yeah, don’t know, I’d have to go count but…

Sean Pyles: Flip through them.

Sean Pyles: But you manage them with a spreadsheet, right?

Liz Weston: Yes, exactly. Every year I go through and look at what kind of perks we’ve earned, what we’re paying in terms of annual fees. Some of these are premium cards, which means they have very high annual fees. I want every single one of those cards to be pulling its weight. If it doesn’t, then I will close it. And we’ll talk in a little bit about how opening and closing and having cards affects your credit score. But I do that mindfully.

It’s a lot of work. I would say probably when I get a bit older, I’m going to simplify and reduce the number of cards. There’s one financial planner I talked to who has her older clients basically reduce themselves to one credit card, one or two, so they’re not trying to juggle all these different cards, because it’s just too easy to lose track.

Sara Rathner: It is. You are also reaching a point in life where unfortunately it’s just harder to make financial decisions. It’s harder to keep track of that stuff, so it is a good idea to simplify. But you can do that at any age too if you feel overwhelmed.

There are lots of sort of tech additions to managing credit cards that I think really help me remember when to pay on time so I can keep up with everything. So if you haven’t done this already, log into your credit card accounts and set up alerts. You can set up alerts that will tell you when your statement closes, when your next bill is due, so you can give yourself a 10-day heads up. You can also, with a lot of cards, request a change to your payment due date. So if you have, say, five credit cards that you use in regular rotation, maybe you make some due after your first paycheck of the month and some due after your second paycheck of the month, or you give them all the same due dates. So literally that’s the one day a month you sit down and pay all of your bills, and that can make it easier to remember, but it can also make it easier to afford, because you’re picking times where your checking account is a little bit more flush.

Liz Weston: Yeah, that’s a really good cash flow management tip.

Sean Pyles: I want to talk now about why we typically use credit cards, which is to get perks from them. It seems like our listener is interested in making the most of that, but maybe they aren’t sure if they want a travel card or a straight up cash back card. How do you guys think someone can determine which type of credit card is best for them?

Sara Rathner: The more often you travel, especially internationally, the more it begins to make sense to utilize travel cards. If you don’t travel that often, cash back is more flexible, because it’s just that, it’s money back in your bank account, or it’s money off of your next credit card statement, depending on how the card gives out its rewards. But either way, it can be potentially a great way to save a few hundred bucks per year, whether that’s on travel or just on everyday purchases.

Travel cards can be a little bit more complicated because they tend to have higher annual fees, not all, because they have more premium perks. They have things like free checked bags for airline cards. General travel rewards cards that are not tied to an airline or hotel will have things like a statement credit for TSA PreCheck or Global Entry or access to airport lounges. But these sorts of benefits are use them or lose them. If you don’t use the card to get free TSA PreCheck, you’re not getting an $85 value out of one of the perks of that card. So if you’re paying a $95 annual fee but you’re not really utilizing any of the additional perks, those are how you offset the annual fee.

Sean Pyles: Yeah. So those are maybe more for the intermediate credit card user who’s savvier and knows they’re going to be getting their credit card’s value’s worth.

Sara Rathner: Right, and there are cards that are a little bit more beginner friendly. The way you earn points is a little bit more straightforward. Some of them have no annual fee or low annual fees. Then redeeming points for either travel or cash back is also relatively simple, so there’s some flexibility built into them. You could use it for travel bookings or not. Really it’s about finding, if you’re interested in a travel card but you’re not interested in one of those super high-end, very complicated travel cards that has a lot of Instagram ads and you’re just not all about that, that’s OK. You could have a simpler card, dip your toe into the pool of awards travel for the first time, see how you like it, see how often you plan on traveling. If you’re able to manage the card and take advantage of its benefits, then you’re going to come out ahead.

Liz Weston: One of the things that may be helpful to know is that some cards are essentially co-branded. In other words, you can only use the points or the miles at that particular airline or hotel or whatever, and others are more general. So they can rack up points and you can transfer them to different frequent flier programs or frequent traveler programs so they can be more flexible.

Sara Rathner: Right. If the airport near where you live, for example, is mostly served by one particular airline, so that’s the airline you fly a lot, then it becomes potentially more worth it to carry that airline’s card because you’ll get things like free checked bags, priority boarding. You’ll earn points when you buy plane tickets. You could use those points to get discounted or free plane tickets in the future. So that’s when it begins to make more sense.

But if you kind of hop around and you just sort of fly whoever based on price and availability, you stay at whatever hotel fits other criteria, like location and price, then it’s less worth it to carry that brand’s co-branded card.

Sean Pyles: Well, one thing we should also talk about is the impact of credit card applications on credit score, because that can be an area where if you apply for too many too frequently, that can set off some red flags and can actually harm your credit score, right?

Sara Rathner: Yeah. So every time you apply for a new credit card or any new loan, the bank or issuer, financial institution, will do what’s called a hard pull of your credit. That’s when they look into your credit history, see what’s going on, and use that information to determine what kind of borrower you could be. They use that to determine whether or not they would accept your application. Then if they do accept it, what sorts of terms would you qualify for, like interest rate.

So every time you get that hard pull done on your credit, it can temporarily ding your credit score by a couple points, like five points. It’s not a big deal on its own. So it’s OK to, quote, unquote, spend a few points of your credit score if there’s a credit card you’re looking for, because provided you go on to paying your bills on time going forward, your credit score will go back up pretty quickly.

But where you might run into issues is if you apply for a lot of credit cards in a short period of time, you might start getting rejected because issuers will see that you’re doing a lot, you’re filling out a lot of these applications really rapidly. Then if you have, say, home ownership on the brain, you’re going to have to have some conversations with the loan officer about why you have all of these credit inquiries from the last few months on your account.

Sean Pyles: I think this is a really important distinction between applying for something like an auto loan and applying for a credit card. If you’re applying for an auto loan, it makes sense to shop around and maybe apply for one to three different loans to see what rates you get. You can do that within a certain window and you won’t be penalized for applying for multiple loans at the same time. With a credit card, on the other hand, you actually should not be applying to maybe three within a two-week window because that could be potentially an issue in terms of your credit.

Sara Rathner: Right. So space it out. If there are a few cards you have in mind, first of all, those cards might be so similar in their features that you don’t necessarily need to have all of them. You could just pick the one of the three that best fits your needs. So shopping around can be very helpful in this regard.

Then, for example, let’s say the card has a signup bonus. Typically you have to hit a spending minimum. So you might see a signup bonus where you earn 40,000 points if you spend $3,000 in the first three months of having a card. If you apply for multiple rewards cards with sign up bonuses at the same time, you’re going to have to spend a lot of money in a three-month period to get all of these bonuses. Don’t do that to yourself. Space them out. Give yourself three months to earn that bonus. Then you can move on to the next one. You don’t want to overextend yourself to earn these bonuses, because if you get yourself in credit card debt, the interest you’re paying is going to wipe out the value of those points. It’s not worth it.

Sean Pyles: Well, you mentioned spacing out applications. Is there an ideal amount of time that people should be spacing out these applications in terms of what’s best for their credit?

Sara Rathner: Credit scoring is such a mystery, honestly. Unfortunately, there’s no manual out there that says, “Well, if you wait six months you’ll be fine, but if you do five months you’ll be in trouble.” It’s not like that. It kind of just depends on what’s going on. But rule of thumb, at least three months, if not a little longer, depending on what else is going on for you.

Also, it kind of depends on whether or not you already have existing credit card debt, because if you have existing credit card debt or, say, a personal loan where you consolidated a few debts into one loan and then you’re continuing to take out more credit, that’s telling lenders that you’re in over your head, and that’s not going to make them want to lend you more money. So that’s also something to consider.

Liz Weston: I think we need to be crystal clear because people get really confused on this, is there’s a difference between what affects your credit scores and how lenders see you. So lenders have their own policies. We talked about this at the beginning, how certain lenders or certain card issuers will turn you down if you’ve applied for too many cards in a recent period of time. Others don’t care. It really depends on how they have set up their lending practices and their lending policies.

In general, I try to let about six months pass between applications, but I don’t really worry about having too many cards, because I know that alone won’t affect my credit score. I do think sometimes a lender might look at somebody who has a bunch of cards and wonder what the heck is going on there, but I’ve never been questioned about that.

Sean Pyles: I think that six-month timeline can also be very useful from a practical standpoint beyond credit implications, because in that amount of time you’ll be able to see what you do and don’t use that card for, the new one that you’re getting, if you’re making the most of it. And then you’ll be up to speed on how best to use it before applying for a new one, so you can really know if you need that new card or not.

Sara Rathner: Absolutely. Let’s say you’ve earned good cash back rewards on dining out or travel, but you’re like, “No, none of my cards really earn that much at the grocery store, and I actually spend a lot of money at the grocery store, because everything’s more expensive right now. Maybe I should look for a card that’s a little bit more rewarding on groceries.” Then that gives you something to focus on when you’re shopping around for your next card. “Let me look for a card that has a higher rewards rate on groceries.” You can cut out so much of the noise once you finally decide specifically what it is that you’re looking for, because there are thousands of cards to choose from. It’s way too hard to slog your way through all of them. You really need to shorten the list.

Sean Pyles: Right. Well, fortunately, at NerdWallet.com, we have plenty of roundups that can help you find the best credit card for your needs.

Sara Rathner: Yes, we also have a great credit card comparison tool as well.

Sean Pyles: A shameless plug moment here.

Liz Weston: Sara, we should also talk about what happens when you close cards. I think people think incorrectly that closing cards can actually help their scores, but that’s not true, right?

Sara Rathner: That is not true. That doesn’t mean that closing a card is bad, but it is something that you just kind of need to think about really carefully and thoughtfully before you do. So when you close a credit card, it can affect your credit score for the negative in a couple of ways. First of all, if it was a card that you’ve held for a long time, losing that card from your card portfolio means the average age of your accounts gets a little younger. Unlike most areas of life, when it comes to your credit score, older is better. Usually youth is worshiped, but in this case you want wisdom and experience when it comes to the age of your account. So that can potentially over time affect your credit score, because suddenly the average age of your accounts is lower.

Then another way it can affect you is if you carry several credit cards, combined they all offer you a total credit limit. In general, we recommend charging no more than 30% of that overall credit limit every month. Under 10% is ideal. But obviously if you have a pretty low credit limit, that can be hard. But try to keep it as minimal as possible, because doing things like maxing out your credit limit is really bad for your credit score. So let’s say you have three cards and each one has a thousand dollar credit limit and you cancel one of them, suddenly you’ve lost a third of your credit limit. But if your spending remains the same, suddenly it’s that much easier to exceed that recommended charging amount every month.

Sean Pyles: There are ways to get around closing an account. Say you have a credit card that has an annual fee and you’re not really using the card, you’re not getting the worth of it to make that annual fee make sense right now, you can do what’s called a product transfer. I did this during the pandemic, where I had a travel credit card, wasn’t really using it, didn’t want to pay that annual fee. I asked the credit card company to move that to a different product that did not have an annual fee, and they did it instantaneously. So now I still have that credit line open that’s helping my credit history seem longer on average, but I’m not paying a fee for it.

Sara Rathner: Yeah, I’ve done that too. It’s a great way to keep an account open on a card that you haven’t been using that much or you haven’t used in a long time, but you keep the age of your accounts nice and old, because again, wisdom. Then you’re also eliminating the annual cost of carrying that card that you haven’t really been using much.

Sean Pyles: Yeah. All right. Well, Sara, thank you so much for talking with us today.

Sean Pyles: Now let’s get to our takeaway tips. First off, go slow and strategize. More credit cards can be a good thing but have a plan. Make sure you can manage adding one new card to your stable before layering on another.

Liz Weston: Next, find the right card for you. Shop around for a credit card that suits your spending habits and goals.

Sean Pyles: Finally, use credit cards responsibly. Make payments on time and try to avoid paying interest, which can eat away at the value of any rewards that you’re earning.

That is all we have for this episode. Do you have a money question of your own? Turn to the Nerds and call or text us your questions at 901-730-6373. That’s 901-730-NERD. You can also email us at [email protected] and visit nerdwallet.com/podcast for more info on this episode. And be sure to follow, rate and review us wherever you’re getting this podcast.

This episode was produced by Liz Weston and myself. Kaely Monahan edited our audio. Jae Bratton wrote our show notes, and a major thank you to the pros on the NerdWallet copy desk for all of their help.

Liz Weston: And here’s our brief disclaimer, thoughtfully crafted by NerdWallet’s legal team. Your questions are answered by knowledgeable and talented finance writers, but we are not financial or investment advisors. This Nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances.