How many credit cards should I have? This question will be argued until the end of time and have no right answer.
However, implementing the Two-Card Rule for managing your credit is the best method there is.
Let’s find out why!
Set up your budget first!
Hold on, pump the brakes Speed Racer!
First you need to choose a budgeting method that fits your style and a budgeting app to help track your expenses.
How are you ever going to select which credit cards to use if you don’t know where your money is going.
Why use credit cards?
Credit cards should be considered an asset in your financial tool belt, but unfortunately operator-error gives them a bad-rap.
Credit card companies reward you for playing by the rules. You earn rewards such as cash-back, points, or miles if you pay back the money they loaned you on-time.
However, fail to pay on-time and be prepared to suffer the consequences of high-interest rates! Let’s be honest, that’s how they make their money.
The only right answer for, “Why use credit cards?”, should be that you are responsible enough to pay your balance on-time in order to collect the rewards.
Dave Ramsey would lecture me for telling people to use credit cards! I say they are perfectly fine if you’re disciplined enough spend only what you have. If not, I agree with Dave, and we’d both tell you to put that shit down!
If you’re not at that level of responsibility yet, stop here and continue using debit cards and cash for purchases.
How to choose a credit card
Using your budget, make a list of all your reoccurring monthly expenses. Most likely, you will start seeing patterns.
Categories such as gas, groceries, travel, dining, online shopping, and entertainment may start to stand out after completing your analysis.
See which categories you tend to spend the most in and then do the following:
- Compile a list of your Top 5 Reoccurring Expenses in your budget.
- Ask yourself, “Am I overspending in this category and should I cut back?”
- Research which credit card company rewards the most for expenses in each of those categories
For example, if you spend 65% of your monthly budget dining out, a rewards card with an emphasis on restaurants would be ideal. However, ask yourself if you should be spending 65% of your income on dining out?
If you have a goal of building your net-worth than the answer should be no!
On the other hand, if you’re spending a great deal on gas because it’s getting you to and from work, then finding a card with rewards on gas is essential. This is because gas is a necessity for your livelihood.
Implementing the Two-Card Rule
Using a combination of two credit cards can place you in a great situation. First, it keeps things extremely simple with purchases. And second, it allows you to collect a good portion of the rewards available from your spending habits.
Lets talk about how to select your two credit cards.
Choosing Card Number 1:
Take a look at your Top 5 Reoccurring Expense Categories. Are the Top 5 Expenses fairly equal or are the number one and two spots significantly more?
- If the Top 2 expenses are significantly more than the others, select a card that benefits from the larger expense category. This will be Card Number 1.
- If your Top 5 expenses are spread fairly evenly, select a card that benefits from as many categories in the Top 5 as possible. This will be Card Number 1.
Choosing Card Number 2:
If the Top 2 expenses in your list were significantly more than the others. You have already selected Card Number 1 to cover your largest expense.
- Can any of the expenses in positions #2-5 be combined to receive rewards in a single card. If yes, do they equal more than #2 alone. If yes, that is Card Number 2.
- If no, then choose a card benefiting expense category #2 and that will be Card Number 2.
If your Top 5 expenses were spread evenly and you already selected a card benefiting from the combined most amount of categories, then next:
- Find the highest expense category that wasn’t grouped into that mix and select a card to will benefit most from its rewards. This will be card Number 2.
Pros and Cons of Credit Cards
Pros of Using Two-Card Rule
- On-time Payments: You will only have two billing dates to remember. This puts you at a significant advantage of keeping your credit score high by always paying on-time. Payment History counts the most toward your credit score.
- Maximize Rewards: You will be able to maximize your rewards by focusing your two cards on the Top 5 biggest expense categories you spend money in.
- Easy Money Management: With only two cards you will be able to quickly analyze your expenses, simplifying your budget significantly.
- Less likelihood of Fraud: Having your identity stolen is no laughing matter. It takes time, headaches, and sometimes money to get back to where you were. By having two cards you’re lessening the chances your personal info is stolen.
- Easy Payment Choices: Having 10 credit cards might allow you to take advantage of more rewards, but it creates un-needed stress for always analyzing and paying with the one that will benefit you most. KISS: Keep It Simple Stupid! Two cards makes it a straightforward game and you won’t be missing out on too many rewards. Its a great balance!
- Credit Card Utilization Rate: Two cards allows you to spread out some of your monthly payments if you find some months where you start to go over your recommended 30% utilization rate.
Cons of Using Two-Card Rule
- Not Maximizing Rewards: You could be getting more rewards by having a bunch of different cards reaping the highest percentage levels in every expense category. However, this leads to a more difficult management situation that is not recommended.
- High Credit Card Utilization Rate: Utilization rate or the relationship of your card balance to your credit limit may be lower by having more credit cards. Under 30% is recommended to keep your credit score from dropping. A simple pay-as-you-go method combats this problem though. You shouldn’t be spending money with a credit card for any amount that you can’t easily payback!
- Card Rejection: Some businesses only allow transactions with certain credit card companies. If yours isn’t accepted, you limit yourself with only one other card. Also, credit cards can malfunction or get placed on Hold for suspicious activity, again limiting your options.
Summary of How Many Credit Cards Should I Have?
Once again there is no right answer to how many credit cards you should have.
Implementing the Two-Card Rule can place you in a spot where the pros really start to outweigh the cons of having multiple credit cards to try and capture every possible point or reward.
If your goal is to keep things simple, but also be able to reap a good portion of the rewards that your expenses can garner, then the Two-Card Rule may be the best option for you!
My only recommendation:
In many situations a cash-back card with a limited number of high percentage categories paired with a generic 1.5% savings card may be the way to go. Everyones budget is a little different, making it impossible to give you the two best cards to choose!