I got three e-mails with this same question yesterday! Mostly, people want to either participate in balance transfer arbitrage or grab a few new rewards cards.

To start off, we must realize that all credit scores are based on secret formulas, supposedly generated by supercomputers and mountains of data to accurately predict our creditworthiness. This results in companies like FICO never truly revealing the ingredients to the secret sauce, otherwise we could just do it ourselves and they’d have nothing to sell.

In other words, nobody truly knows the answer. Now, I have never read anything official that specifically listed “number of credit cards” as a negative factor in scoring. We can only examine what they have revealed and try to read between the lines. For example, FICO has previously released this breakdown:

Some of these aren’t related at all to the number of credit cards you have, such as “on-time payments” and “mix of credit used”.

Capacity used – This simply means how much of your available credit you are using, sometimes referred to as utilization ratio. If you’re maxed out on all your cards, obviously that’s not a good sign. If anything, having more credit cards would mean more available credit would lower this your utilization ratio and be a good thing. Now, individual creditors might balk at someone having too much available credit, but it doesn’t appear to factor into the FICO score.

Length of credit history and past credit applications – To be specific, not the only length of your oldest line, but also the average age of all your accounts matters. Continuously opening new credit lines will hurt your credit score. At the same time, having a lot of old cards can “anchor” your average account age as well. For example, if I already have 20 cards averaging 7 years old, adding another new credit card won’t make that average budge hardly at all. Again, we see that if anything, having a lot of cards might actually be helpful. (This is why I also don’t cancel credit cards unless it’s profitable to do so.) However, opening a bunch of cards all at once is also an indicator of desperation, so I limit myself to about 3-5 credit cards per rolling 6-month period (for profit and more profit).

Another source of information is the FICO Score Estimator from myFICO. Here, how many credit cards you have is the first question asked! Uh-oh. But again, I think the first two questions mainly help determine your average account age. It’s also a filter as you need at least one card that is 6 months old for the estimator to work. If you look at all 10 questions you’ll see many parallels with the pie chart factors.

Finally, there is personal experience. I have over 20 credit cards (average is ~10 per consumer) and have seen no indication that having too many credit cards makes my score any lower. When not in 0% debt, my score is excellent. Therefore, if you ask me, having too many credit cards may give people too much temptation or too much clutter, but based on the evidence available I don’t believe that having too many cards by itself lowers one’s credit scores.

Here’s a funny clip about credit cards from the The Daily Show. Thanks to Ross for the tip.

I especially like the theory that as long as your carry your debt long enough, you can simply die and never pay it off! Why didn’t I think of that??

I had written previously about renting out your credit score, which takes advantage of a loophole in the credit score formula and allows people with poor credit scores to pay others with excellent credit so as to be added as an authorized user. This currently legal act can boosts a poor credit score as much as 200 points, and is most commonly used to obtain a lower rate on their mortgage loans. As you might expect, lenders aren’t too happy about this.

According this AP article ‘Piggybacking’ Roils Credit Industry, this has led to some potential significant upcoming changes in the FICO scoring process:

Ninety percent of the largest U.S. banks base their loan decisions on FICO scores, which currently includes authorized user accounts. However, after discussions with lenders and industry officials, Fair Isaac said it intends to announce this week that all future versions of its FICO score methodology will no longer consider authorized user accounts, said Tom Quinn, Fair Isaac’s vice president of scoring solutions.

The next version is slated to roll out in September to one of the three main credit reporting agencies — Equifax Inc., Experian Information Solutions Inc. or TransUnion LLC — with the other two agencies receiving the new version some time in 2008.

Quinn also noted that some lenders generate their own scores using authorized user accounts in their calculations, so the practice may not be easily negated.

Other consumers besides credit renters stand to lose with the change, namely those for whom authorized user accounts were designed: college students on their parents’ cards and spouses with little to no credit of their own.

That’s too bad, I would think that there would be a better way to close the loophole. Perhaps simply make it illegal for one to accept money for adding an authorized user? That would at least shut down the websites running openly.

MSN Money recently wrote a new article titled 0% daredevils chase ‘free’ cash discussing the practice of borrowing cheap money from credit cards offering 0% APR interest and no fees, putting that money into an online savings account at 5-6%, and pocketing the difference as profit!

Now, I may be a tiny bit biased, but I think my series of step-by-step posts on how to make money with 0% APR balance transfers is a better. (I suspect she might have even read it before writing her article!) I even put my warnings in the very first post. 😉

You’ve probably heard that the average American has over $8,000 of credit card debt. It’s been quoted all over the place. But does that single stat accurately explain the whole picture?

A popular source of this data is CardWeb Inc., which tracks such credit card data. Let’s take their 2002 data, which says that American households had average credit card debt of $8,940. Wow! But look closer. This figure is arrived at by dividing total credit card debt outstanding at the end of 2002 ($750.9 billion) by the number of American households that have at least one credit card (84 million). So not only are you counting balances that will be paid in full within the grace period, you are also only dividing by just the households that have a credit card. There are 21 million families with no credit cards at all.

Instead, I think you should only take the the amount of debt that Americans actually paid interest on, and divide it by all American households. To me, this is a more accurate definition of “average credit card debt per American”. This is $612 billion divided by 105 million, or $5,829 per household. And that’s not all.

Another source of information is the Federal Reserve’s Survey of Consumer Finances (SCF). Here, the 2004 survey found that the average (mean) balance for those carrying a balance was $5,100, but the median was only $2,200. The large difference between the mean and median values indicates that the debt is not spread around equally – a small amount of borrowers have the majority of the debt. In addition, only 46% of families actually carried a balance, and 25% of families don’t even have any credit cards at all.

Now, what is the relationship between debt and income level?

(This is actually based on Cardweb data, but the SCF data is very similar.)

Here, we see that as income increases, people are more likely to both use credit cards and also carry higher balances. But from a recent Gallup poll, while the overall debt-to-income ratio among credit card holders is 8.0%, it is over 10% among people earning less than $40,000 a year, and much smaller among people with higher incomes.

Also, I observed that the Federal Reserve total debt numbers are lower than the Cardweb numbers, but the other stats like card ownership and the distribution vs. income are very similar. I suspect that one major reason for this is the self-reported nature of the SCF: People are underestimating their debt due to either denial or embarrassment. So that $2,200 number above may be higher in reality, but still not as high as $5,000 or $9,000.

Summary
On one hand, you cannot refute the fact that credit card debt is indeed a huge problem for many families. Any way you cut it, $612 billion is a big number. And the families with the highest debt-to-income ratios are earning less than $40,000 a year. I think better education and more transparency in credit applications should be implemented.

However, many of the sound bites thrown around about credit cards are very misleading. The majority of households don’t pay any credit card interest at all. None. Zero. Zilch. Of the families that do carry a balance, the median amount owed is in the neighborhood of $2,000-$3,000. Paints a different picture, doesn’t it?

(Yes, people like me who profit from credit card debt probably skew the stats a little tiny bit as well. 😛 )

References
The idea for this post was taken from an older MSN Money article, which used 2001 data. You can find the 2004 Survey of Consumer Finances here, and the Cardweb data here.