Having more credit cards can harm your finances in a

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Having more credit cards can harm your finances in a number of ways, including: • You may be tempted to use all of your cards and, as a result, you may take on more debt than you can af- ford to repay. A lot of open accounts, even if you owe little or noth- ing on them and have managed them well, will dam- age your credit record and lower your credit score since as long as they are open you could run up the balances on the accounts. • Every time you apply for a new credit card, it will show up in your credit history as an inquiry. The more credit-related inquires you have, the more you will damage your credit history and the lower your 142
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Using Credit Responsibly credit score will go. In fact, currently each inquiry re- duces your credit score by four points. Just a handful of inquiries can mean the differ- ence between getting the credit you need and being denied credit. You should also avoid having a lot of outstanding loans, especially loans that you have secured with your home. If you can’t pay those loans, you risk losing your home. So when you are using credit, how much debt is okay? As a rule of thumb, most financial advisors say that you should not be spending more than 10 percent of your net household income (after-tax income) servicing your debts, not including your mortgage, car loan, and your home eq- uity loan. Therefore, if your net income (take-home pay) is $2,000 a month, you should not be paying any more than $200/month on your credit card and other consumer debts. These same financial experts also advise that how- ever much debt you have, you should be able to repay all of it within 12 to 18 months. If you can’t, you owe too much. For example, if the combined outstanding balance on your two credit cards is $5,000 with an interest rate of 18 percent and you are presently paying $150 per month on that debt, it will take you more than three years and 11 months to repay it. Therefore, you will need to increase substantially the size of your monthly payments to pay the debt off within 12 to 18 months. For a more in-depth dis- cussion of how to assess the state of your finances and de- termine whether you owe too much, return to Chapter 1 in this book. Warning 143
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Credit Hell When You Are in the Market for a Credit Card There are good credit cards and there are bad ones. Good credit cards have attractive terms of credit so they cost less to use than bad ones. Therefore, when you are in the mar- ket for a credit card, your goal should be to find a card with attractive terms. The federal Fair Credit and Charge Card Disclosure Act (FCCCDA) makes this relatively easy to do because it requires credit card companies to provide you with specific information about the terms of their of- fers allowing you to compare offers. The FCCCDA-required information includes a card’s: Annual percentage rate (APR). This is the amount of in- terest you will pay annually on your credit card bal- ance. The higher the APR, the more you will pay to use a card, assuming you do not pay off your card bal- ance each month.
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