Despite increased penetration of credit cards among the Indian consumers, a sizeable section still fears credit cards as a means for stepping into a debt trap. Even a large section of those who hold a credit card desist from applying for additional cards in the fear of accumulating unmanageable debt. However, for the financially disciplined, the benefits of having multiple credit cards always outweigh its cons.
Here is a list of the pros and cons of having multiple credit cards:
Pros of having multiple credit cards:
# Increases your reward points: Most credit cards are designed keeping in mind specific requirement of customers. While some cards offer higher reward points on fuel transactions, others offer higher reward points on air travel or shopping etc. For instance, a fuel card may earn you higher reward points on fuel spends apart from fuel surcharge waiver. On the other hand, lifestyle card or a travel credit card would offer fuel surcharge waiver at most. So, if you are spending a sizeable amount every month on refuelling for commuting, a petro credit card for refuelling transaction will save more money for you than any other credit card variant.
# Overcomes reward points caps: Credit cards often come with a cap on the total number of reward points that can be earned within a particular billing cycle. Having multiple cards will allow you to route transactions through other cards once you exhaust your primary credit card reward points.
# Provides backup in case of theft/loss of your primary card: In case of theft or loss of a credit card, it usually takes at least three days to receive replacement credit card. Under such circumstances, you may be forced to use your debit card for making payment. Having multiple credit cards would allow you to divert your payments to other credit cards, thereby keep your liquidity undisturbed.
# Beneficial for credit score in the long term: Multiple credit cards can help reduce your credit utilisation ratio. This ratio is the proportion of the total credit limit used by you. Lenders consider those having credit utilisation ratio over 30% as credit hungry and tend to reduce credit score on breaching this limit. On the contrary, a consistent track record of having credit utilisation ratio under 30% increases your creditworthiness, leading to increase in your credit score.
For example, assume that you have a credit card with Rs 80,000 credit limit and you used it to make payments worth Rs 40,000 in a month. Your credit utilisation ratio for that month would come to 50%. Now, if you had another credit card with credit limit of say, Rs 60,000, your credit-utilisation ratio for that month would have come down to about 29% (approx.). Thus, multiple credit cards can help you to contain your credit utilisation ratio within 30% and steadily improve your credit score over the long term.
# Makes most from the interest-free period: Interest-free period of credit card refers to the period between the 1st day of its billing cycle and the due date for paying off outstanding dues. Transactions made during this period incur no interest cost as long as the entire amount is paid on time. This interest free period can range anywhere between 18-55 days depending on when a particular transaction was made. Having multiple cards with billing cycle spread across the month will help you to spread out your expense.
Cons of having multiple credit cards:
# Difficulties in managing multiple cards: Multiple credit cards would lead to the generation of multiple credit card bills and due dates. People having difficulties in remembering their repayment schedules and bill due dates may end up in missing repayments. This may lead them to incur steep finance charges and late payment fees, and may also harm their credit profile. To avoid such situations, opt for standing instruction to allow automatic deduction of your outstanding bill amount from your savings account.
# Risk of over-spending: With credit cards offering attractive offers and discounts round the year, many credit card holders end up making card spends just to avail those card benefits. Thus, having multiple credit cards may risk those lacking financial discipline to spend beyond their means.
# Might reduce credit score in the short term: Whenever you apply or enquire for a new credit card, the card issuer will fetch your credit report to evaluate your creditworthiness. Such credit report fetches are considered as hard enquiries and they reduce your credit score by a few points. However, this loss is only for the short term. As you consistently repay the bills by the due and maintain your credit utilisation ratio within 30%, your credit score will steadily recover in a couple of months.
(The author is Director & Head of Investments, Paisabazaar.com)