In this week's edition of "Bank of Dad," we tackle how many credit cards, if any, is the ideal number, and whether or not making two mortgage payments per month is ever a good idea.
I have a simple question, but I never get a clear answer: How many credit cards should I have? That is, what’s the ideal amount and why? What’s the point of having more than one? — Ernesto, Las Vegas
As far as your credit score is concerned, there really is no “ideal” number of credit cards. But I did reach out to a couple of the leading credit-scoring companies to find out whether the quantity of accounts even makes any impact.
VantageScore spokesman Jeff Richardson told me it’s not a factor in how the firm tabulates your number. “You can have one or a dozen cards and still have an excellent credit score,” says Richardson.
FICO’s VP of scores and analytics, Ethan Dornhelm, gave me a slightly more qualified response. “The sheer number of credit card accounts that a consumer has is much less important to the FICO score than how the consumer is managing those accounts,” he told me over email.
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That said, the amount of plastic in your wallet does affect your score in a more roundabout way. For example, having at least one card and making payments on-time helps you build a credit history.
And sometimes it may help to have more than one. That’s because the major credit-scoring models use “credit utilization” as one of their biggest factors. In plainspeak, that’s how much of the available credit on your accounts that you’ve actually borrowed. If you have a $5,000 credit line and a balance of $3,000, your utilization ratio would be 60 percent.
The more cards you have, the more available credit you have. Thus, the same balance, if spread out over multiple cards, would yield a lower utilization rate. Try to keep your utilization rate under 30 percent, if possible — it shows you can responsibly handle your credit and will elevate your score.
Keep in mind, though, that having too many cards can hurt you, too. You can be tempted to borrow more, simply because you can. And owning a lot of cards with a balance represents a higher risk in the eyes of the credit gods.
So the “ideal” number of credit cards really does vary from person to person. If you’re on a tight budget, I tend to think you should stick with one or two. In the long run, the temptation to rack up debt can get you into trouble. For those who are able to easily pay down their balances, but use the cards to rack up endless reward points, accruing a slightly larger stack of cards is less of a worry.
Interestingly, Dornhelm says FICO recently analyzed the habit of what it calls “high achievers” – those with a score over 800. It found that they average person in that group had three open credit card accounts. But in reality, that’s much less important than keeping your balances low and making your payments on time.
Is it true that making two mortgage payments a month helps you pay off your loan quicker? — Kenny, Salt Lake City
It certainly can, if you make payments every two weeks. I think this is definitely a strategy worth considering, especially if you get paid on a bi-weekly basis anyway.
For it to work, you need to pay half your monthly amount every other week, instead of once a month. Because there are 52 weeks in a year, you’ll be paying 26 times this way. That’s one full extra mortgage payment. As long as you keep it up, you can pay off a 30-year mortgage roughly five years faster and save a lot of money on interest payments.
The lending site Bankrate actually has a handy calculator where you see the effect for yourself. I plugged in a 30-year home loan with a balance of $200,000 and an interest rate of 4.5 percent. By making payments every two weeks, a homeowner would save a little over $29,000 over the course of the loan.
This is pretty straightforward if your lender offers a bi-weekly payment option. Alas, not all of them do. But what you can do is make an extra annual payment on your own, which accomplishes the same goal.
Just divide your monthly mortgage payment by 12 and put that amount into a separate savings account. At year’s end, you’ll apply that money toward the principal on your home loan.
Bear in mind, this probably doesn’t make as much sense if your loan has prepayment penalties. It’s certainly worth checking on that. And you can argue that any money you save is better invested in a tax-advantaged account than your mortgage, especially if you’re enjoying a low interest rate. The fact is, though, a mortgage is a psychological weight that many homeowners want to get rid of as fast as possible – this is one fairly simple way to do it.
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