Does having too many credit cards impact your credit score?

Calculating your credit score seems like a tricky business to figure out, but it’s not that hard a task. Most credit scores are a composite of as few as five factors, though the factors do not have equal weightage and the aggregate of the five is considered the score.

Things get a little complicated when you acquire more credit cards. To understand the mechanism of credit score with multiple credit cards, let’s first understand the basic factors that affect credit card scores and then move on to how having multiple credit cards impact these factors positively as well as negatively.

So here’s a point-by-point breakdown of how each factor in calculating your credit score is affected by having many credit cards.

Payment history

Payment history is responsible for 35% of your credit rating. This covers all the debt you have – but most importantly your credit card debts. Companies are quick to report even a single day’s default, and that adversely affects your credit score.

If you manage to pay your outstanding amount on all your credit cards regularly, this factor is not affected at all by having multiple credit cards. Be warned that late payment by even a day negatively affects your rating and it gets a little difficult to keep track of all your payments if you have multiple cards.

Debt-to-credit limit ratio

This accounts for 30% of your credit rating. The ratio is calculated by the outstanding debt you have to the available credit you possess. Your credit rating starts bleeding if the ratio exceeds 30%.

This score is initially positively affected if you have more credit cards (as your available credit amount increases). Care must be taken, however, to maintain this ratio below the 30% threshold.

Length of credit history

This accounts for around 15% of your score, and it relies on your entire credit history. Making payments on time is the main factor that keeps this factor healthy and improves your credit score.

The trick here is to keep the average age of your credit account long. Adding new cards frequently will keep dragging this score down and will negatively impact your credit rating. Introduce new cards infrequently and only when you have a requirement to do so.

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New credit

About 10% of your score depends on this. Anytime you have a new credit source granted to you, your overall credit score dips a bit. This is because new credit always increases your credit risk.

Sadly, this will always be negatively affected whenever you avail a new card. Too many, and you will red-flag this! So introduce new credit as gradually as you can, and allow this score time to recover.

Type of credit

If you have a single source of credit, this will negatively impact your overall credit score. Keep a diverse portfolio of credit (retail account, mortgage, auto loans, instalment loans, etc.) to keep this score up. It accounts for a further 10% of your total credit score.

If you already have diverse credit scores, then opting for more cards ought not to affect this negatively. If, however, you have only  credit cards as your source of credit, each new card will adversely affect this factor.

Terms & Conditions apply. Issuance of credit cards is at the sole discretion of Kotak Mahindra Bank Limited. All features and benefits are subject to Credit Card Terms and Conditions. Please read the Credit Card terms and conditions carefully provided on the bank website www.kotak.com.

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