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Credit accounts – how many should you have?

Several credit cards and credit accounts

It’s often a question that comes up, and not many of us know the answer to. Credit accounts build the framework for any credit score. With little or no credit activity, you will struggle to obtain a credit score depending on the scoring model. Whether you have one account or ten, you may have wondered if there is a right or wrong answer to the number of accounts you should have open at any one time. This article provides some insights on this very topic – how the number of accounts you have open can affect your credit health.

How many accounts do you need?

The term “credit accounts” actually refers to any type of account which appears on your credit report. Some examples being: personal loans, credit cards, car loans or mortgages. The tricky thing is there isn’t a precise number of credit accounts that you should have in use to get an excellent or perfect credit score. The optimal number of active accounts depends on your personal situation or circumstances. If you are somebody that likes to spread out your balances, so you’re not hitting your credit limit on a certain account, having more than one credit card to use will give you more credit to utilise. Opening new credit cards could also earn you better reward deals, such as cashback and promotional rates that may be on offer. It really does depend on what works best for you.

The impact on your credit score

The three main factors that contribute to your credit risk and behavioural patterns are maintaining, opening and closing accounts. These actions play a bearing on a number of different factors to make up your credit score.

  • Hard inquiries – a hard inquiry will most likely cause your credit score to drop by a few points initially, but if you need to secure a line of credit such as a secured loan or a mortgage, they are part and parcel of the application process due to the lender reviewing your eligibility as a potential creditor. The impact to your score won’t be affected for long as the inquiry eventually falls off your report.
  • Credit card utilisation – the number of credit cards in circulation will directly impact this factor, which is very influential to your score. The more credit card accounts you have open, the greater your total available credit limit will be, giving your balances more room to breathe.
  • Recent credit behaviour – this trigger looks at the number of new accounts you’ve opened. Although it’s not the most influential, it certainly flags if you attempt to open a series of new accounts over a short space of time. Your potential creditor may view you as potentially desperate for credit, which is never good.
  • Account mix – having a variety of accounts will show that more creditors vouch for your ability to repay debt. Showing a mix of account types on your report, like a credit card, instalment loan and a mortgage, gives lenders more assured that you have a positive history with credit behaviour.

The above factors are by no means definitive reasons to open more accounts or not, but they are useful benchmarks to keep in mind. To add some further clarity, we’ve added some scenarios to paint a more realistic picture:

Scenario 1: You’ve decided that the time is right to start building a credit file. Fortunately, you’re successful in your application for a credit card and your account is now open. The question comes to mind; should you apply to other credit card providers in an attempt to accelerate your credit score and your total number of accounts? Probably not a good idea, building an excellent credit score will take time, so you should just stick with one card and open up a new account when the time is right. It’s crucial to make your repayments on time, more so than increasing your total number of accounts.

Scenario 2: You’re now an established credit user. You’ve proven the fact you can responsibly manage a credit card for several years. Now is the time where you feel it’s right to open up another card, and you could really do with the upside of new buying power and some of the additional perks that come with it. In this scenario, opening up a new card is advisable, because a new card would buffer your credit utilisation rate and increase your total number of accounts.

Scenario 3: You’re are on the brink of paying off your car loan – well done! Although you find yourself a little nervous as a result of this, due to the concern that your credit score may drop a little. Why would my credit score be impacted negatively by clearing a balance you ask…surely that’s a good thing? Your combined number of accounts, account variation and credit history lifespan might be impacted by paying off your loans momentarily. Does this mean you should hold off or reduce your repayments? Not quite. It’s advisable to look at exactly how much debt your carrying, assess the related interest charges and how these loans might restrict your spending ability.  Undeniably, having an excellent/good credit score is a valuable thing, but sometimes you need to weigh up what’s more important in the short term.