Reader Rebekah has a question about credit cards. She and her husband pay off their cards every month, but like to charge most of their expenses because they enjoy the reward points. She’s wondering if this is a good idea and how it affects her credit.

Rebekah asks:

I was wondering about Credit Cards. Specifically having to do with keeping multiple with no balance vs. none at all. How much does your credit rating get hit when you open a credit card, even if it is a store card? My husband & I pay off our credit cards every month but put everything on them for points reasons & to track our spending. We like to take advantage of the credit card offers with points attached to them since its an actual reward you can use, but is it really worth it?

Would we better off in the long run paying for the reward to ourselves?

First of all, congratulations on paying off your balances every month! Now, as far as having multiple credit cards open with no balance, I’ll assume that we’re talking about a few credit cards — and not some crazy high amount. Sound fair? Ok.

There are several factors that go into your credit score. You’re asking about two of them: Recent credit inquiries, and total available credit.

Credit inquiries fall in a section of your credit score called “New Credit.” This section makes up 10% of your total score. When you apply for new credit, (like a store card, or a credit card) a note is made on your credit report and it is figured into the “New Credit” portion of your score. Everyone’s credit is different. Here’s how Fair Isaac, the company that issues FICO scores, explains the situation:

Inquiries are a subset of the “new credit” category shown above, which accounts for 10% of the total FICO score. Their importance depends on the overall information in your credit report. For some people, a given factor may be more important than for someone else with a different credit history.
…
For many people, one additional credit inquiry (voluntary and initiated by an application for credit) may not affect their FICO score at all. For most people, a credit inquiry will only decrease their FICO score by a few points.

Inquiries can have a greater impact, however, if you have few accounts or a short credit history. Large numbers of inquiries also mean greater risk: People with six inquiries or more on their credit reports are eight times more likely to declare bankruptcy than people with no inquiries on their reports.

So unless you’ve applied for six credit cards in the last few months, you should be OK, which is why for the sake of this answer we’re assuming that you’re not a compulsive credit card collector.

Now, on to the second part of your question. Is it OK to have multiple credit cards with no balances? Yep, that’s just fine. Having multiple cards affects your “credit utilization ratio.” Only you know how many cards we’re talking about here, but the basic idea is that your credit score is affected by how much of your total available credit you’ve used.

Think of all of your credit cards as a big pizza. When you borrow money, that’s like eating a slice of the pizza. The FICO score reflects how much pizza you have left. When you close an account — you’re starting with a smaller pizza!

Now, this doesn’t mean you should go out and apply for 90 million credit cards, but it also means that you shouldn’t worry about having more than one card.

Here’s how Fair Isaac explains it:

Say you have 3 credit cards. Credit card 1 has a $500 balance and a $2000 credit limit. Credit card 2 is an unused card with a zero balance and a $3000 limit. Credit card 3 has a $1,500 balance and a $1,500 limit. In this scenario your credit utilization ratio looks like this:

Total balances = $2,000 ($500 + $1,500)
Total available credit = $6,500 ($2,000 + $3,000 + $1,500)
Credit utilization ratio = 30% (2,000 divided by 6,500)

Now, if you decide to close credit card 2 because it’s an old card that you never use, your credit utilization ratio looks like this:

Total balances = $2,000 ($500 + $1,500)
Total available credit = $3,500 ($2,000 + $1,500)
Credit utilization ratio = 57% (2,000 divided by 3,500)

You can see that your utilization ratio rose from 30% to 57% by closing the unused credit card.

And finally, are credit card reward points worth it?

If you follow a budget and are not spending more in order to “earn” points — then yes. There’s nothing wrong with using a credit card to collect points on things you would have bought anyway. The trouble is that many people don’t actually do this.

Reward points are there to get you to spend more, and if you’re worrying about it enough that you’re writing in to us, perhaps you should take a look at your budget and decide if you’re really getting a good deal.

Will closing a credit card account help my FICO score? [MyFICO]
Credit Inquires [MyFICO]
(Photo: ChrisB in SEA )

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