Having three credit cards with a combined limit of Rs 5 lakh may appear beneficial, particularly when it comes to maintaining a healthy credit profile. However, simply having access to more available credit does not automatically mean your credit score will increase.
One of the important factors considered in a credit score is the credit utilisation ratio (CUR). This ratio makes up about 30% of your credit score. It represents the amount of credit you are using compared with your total available credit limit.
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For example, if you have three credit cards with a combined limit of Rs 5 lakh and your outstanding balance is Rs 50,000, your credit utilisation is 10%. If the same Rs 50,000 outstanding is against a total limit of Rs 1 lakh, the utilisation would be 50%.
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A lower utilisation ratio is generally viewed more favourably by lenders and credit bureaus because it indicates that the borrower is not heavily dependent on available revolving credit. 30% credit utilisation rate is considered ideal.
Factors That Affect Your Credit Card Score
Applying for multiple credit cards simply to increase your overall limit may not be a good strategy. Every new credit application can result in a hard enquiry on your credit report, and several applications within a short period may temporarily lower your score.
Higher limits are not an invitation to spend more money. If your spending rises to match the Rs 5 lakh limit, your score will drop.
The number of cards you hold is also less important than how you manage them. Payment history makes up 35% of your score. Managing three separate bills means you must track multiple due dates to maintain a healthy credit history. Missing payments or carrying large outstanding balances can hurt your credit profile, even if your total available limit is high.
For instance, someone with three cards and a Rs 5 lakh combined limit who regularly uses Rs 4 lakh may have a weaker credit profile than someone with a Rs 2 lakh limit who consistently uses only a small portion of it and pays the bills on time.
It is important to remember that credit utilisation, payment history, length of credit history, the mix of credit accounts and recent credit enquiries all play a role in your credit card score.
Therefore, a Rs 5 lakh total credit limit can provide greater financial flexibility and potentially help keep utilisation low, but more available credit by itself does not guarantee a higher credit score.
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How Many Credit Cards Should You Own?
The number of credit cards you own completely depends upon your lifestyle needs. For instance, if you want to access travel miles, you can take on a credit card specifically for this reason.
You may take another credit card for shopping and dining out benefits. Those who own a car can go for a credit card that offers fuel surcharge waivers. However, whether you have one or many credit cards, make sure to spend responsibly, use them carefully, and make your payments on time.
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