Editorial Policy

Two credit cards better than one to boost credit

Erica Sandberg

April 21, 2016

Q Hi Erica,

Would it better for my credit to have one credit card with a limit of $5,000 or to have two credit cards that have different limits but that add up to $5,000? Thanks for your advice. — Luke

A Dear Luke,

The answer: Two credit cards will help credit scores rise more than a single card will — as long as both credit cards are well managed. And the credit score increase will be greater with one of the two main scoring companies.

Here’s why:

There are two main credit scores that lenders use to assess risk. The FICO score is the more common, but VantageScore is gaining ground. Although the companies use the same data listed on consumer credit reports, that information is plugged into proprietary mathematical models.

Neither company will reveal exactly what goes into its algorithms, but FICO and VantageScore do offer basic information. For example, the way you’ve been making your payments is the most important factor to both scores, but FICO ranks credit utilization (the amount you owe relative to the amount you can borrow) as the next most important ingredient. With the VantageScore, the second most important factor is how long you have been using credit and the types of credit in use (the mix of credit accounts you have). For FICO, the types of credit you have figures less in the scoring calculation.

The credit utilization aspect of credit scoring is often misunderstood. So to make it perfectly clear, using credit cards to pay for things is good (as it provides activity on a credit report), but keeping a revolving balance is not (as it shows you’re in debt).

When analyzing credit utilization, FICO looks at the total amount that you might owe and compares it to the combined sum of your credit lines. However, it also takes individual credit card activity into account. It’s like this:

Scenario A: You have one credit card with a $5,000 limit and a $1,000 balance, so you are using 20 percent of your credit limit.

Scenario B: You have two credit cards, one with a $4,000 limit, which is free of debt and the other with a $1,000 limit that you’ve charged to the limit. Your credit utilization across both cards is also 20 percent if you add the credit limits together ($1,000 divided by $5,000).

While the utilization ratio for both scenarios is identical (20 percent), Scenario B will take a greater toll on your FICO score, because one credit card is maxed out. For this reason you would have to be more careful to spread a balance out over the cards you have.

With two cards, you have the opportunity to lower your credit utilization ratio as you have two credit lines with which to work.

Outside of the scoring aspect, focus on whether two cards or one is the better option for you.

Having two (or more) credit cards can be a good safety measure. A backup account could come in handy if one card is lost or stolen and you have to alert the issuer of possible (or actual) fraud. During a fraud investigation, that account may be suspended for a while. With two cards, you’ll be able to use the backup in the meantime.

There are a couple of downsides to having only low limit cards, though. The first is you may not have enough borrowing power with one card to pay for something you want. Splitting payments is rarely a problem at brick-and-mortar stores, but it often is difficult to use two cards for one transaction when shopping online. For example, you might have to purchase gift cards from that retailer and use those to make up the difference.

Another consideration is personal preference. If you feel more comfortable managing one account instead of multiple credit cards, than that may be the best decision for you.

Try not to fret about the minutiae of how scores are calculated. Instead, consider your financial health and habits. It’s always best to pay on time (which also prevents unnecessary fees), keep debt low (so you don’t overpay for purchases because of accumulated interest) and be armed with a sufficient amount of borrowing power. Do this, and your credit scores, no matter which company is calculating them, will naturally rise.

Got a question for Erica? Send her an email.

SEE ALSO: 4 credit-building steps to land you in the 700 club

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