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Credit cards and credit scores

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Question: I use my credit cards for the sole purpose of building credit. I do not have a long credit history, I make a small monthly purchase on each card (3 total), and pay off the balance each month. I am worried that, due to my low usage patterns, the credit limits may be reduced or I will be charged a fee (reflective of the new measures card companies are taking to make up for anticipated revenue losses). Should I increase the monthly activity on my cards despite the inconvenience of dealing with many transactions spread over several cards? Phil, Louisville, KY

Answer: When it comes to borrowing money for something that matters, such as a home, it’s important to show a healthy credit history in order to get a good interest rate on the loan. That said, I wouldn’t clutter up your finances with multiple credit cards.

Thanks to Elizabeth Warren, the Harvard law professor and chief watchdog of the government’s bank bailout program, the phrase “plain vanilla” has entered personal finance. The idea is to have straightforward, easily understood loan products, from mortgages to credit cards. Plain vanilla is also another way of saying, “Keep it simple.”

Why bother with three credit cards? One is enough for most people. It’s a good starting place at least. For instance, lots of people do have more than one because they use a credit card for personal use and another card for business expenses. It makes record keeping much easier to have two cards. So, why track three cards if one or two is sufficient for your needs?

I answered a variation of this question last June here. The comment section shows that some people agreed with me on sharply limiting the number of cards and others didn’t. (The question and answer also dealt with debit cards and a number of comments are directed toward that subject.) There isn’t any reason from a credit scoring perspective to boost your credit card spending, either.

It’s true that if you close down one or two of your credit card accounts your credit score could get dinged. But the effect will fade. The real trick to creating a good credit score is establishing a long-term track record of paying your credit card bills on time. If you can do that with one credit card, why not? It makes life simpler and, when it comes to finance, simplicity is a virtue.

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