Credit cards are a wonderful tool. When used properly you can delay paying for a purchase for over a month, leaving money in your bank account earning interest. However when cards are used incorrectly they can lead to overspending, damage your credit rating and lead to a massive interest bills that cancels out any gains you may have made by delaying a payment, or through rewards programs.

Credit cards and credit ratings

Each time you apply for a credit card the banks will check your credit rating. Your credit rating helps the banks determine how much of a risk you are, and how likely you are to get in over your head and be unable to make payments on your card. While this sounds like an innocent check on your records, it also leaves a mark. Some lenders may do a ‘soft pull’ to check your credit score but these are few and far between. Most do a ‘hard pull’ which means not only do they check your credit score, but your credit report is updated with a note saying that you have applied for finance and their response. A hard pull against your credit that is approved will have a minor negative effect, but if you are denied credit, either through a credit card or a loan, it puts a big black mark against your name.

Before applying for a card consider running a check yourself to look at the health of your credit report. There are multiple companies online that will offer a free once off check.

How banks view open credit cards

If you are applying for a credit card, mortgage or personal loan banks will assess your existing debts and any open credit cards. When considering your borrowing capacity banks will calculate those credit cards as if you have spent the full limit, even if you only ever use a small amount and pay it in full each month.

While it might seem like a good idea to open multiple credit cards to receive sign up bonuses, keep in mind how this may affect your borrowing capacity. If you have plans to take out a business or personal loan in the next few months, now is not the time to be applying for a new credit card.

What to do with all this available credit

The final big risk with too many cards is temptation. My bank account currently tells me I have over $10,000 available, but the vast majority of this is available spending on my credit card, and isn’t truly my money. Having those funds available can be extremely tempting. If you let your spending get even a little out of control you could find yourself paying hundreds in interest costs. With multiple cards the problem is expanded because not only do you have a large amount of ‘money’ available, but you have to track your spend across multiple locations and keep track of varying repayment dates.