Master Your Credit Cards

These days, we make the majority of our purchases not with cash but with credit cards. All kinds of credit cards—from business cards to store credit cards to travel reward cards to cash back cards. With so many options available, it's easy to accumulate more plastic than you need. After all, who among us hasn't fallen prey to the lure of store credit cards and that initial discount? A recent Gallup poll found that nearly 80% of Americans carry at least one, but the average American has more than three credit cards.

So what do you do if you don't want all that credit and accompanying debt? Should you close excess cards? Leave them open and empty? And how might those actions impact your credit score—which can affect your ability to get a loan for a car, rent an apartment, buy a home or even buy a new phone. Here's what you need to know.

What's the right amount of credit cards?

There's no hard and fast rule about how many cards one should have. Priya Malani, the founder of Stash Wealth, a modern financial planning service, says that she typically advises clients to have no more than three cards open. This makes it easy to keep track of spending and spot fraud but allows you to spread out your debt and boost your credit utilization ratio (CUR), which accounts for 30% of your overall credit score.

Your CUR is calculated by looking at the amount of credit you're using, and dividing it by the amount of credit you have available. Say you have three credit cards:

Consider outstanding debt when closing a card

If you pay off Credit Card #3 and decide to close the card, you'd still have $3,500 worth of debt, only now your available credit will drop to just $7,000. Meaning your credit utilization just jumped to 50%. The decrease in your available credit actually drags down your credit score. Stash Wealth advises clients to maintain a healthy CUR—anything under 30% is good. Under 20% is great. So in the above scenario, you'd be better off keeping the account open and paid off to maintain the available credit (or utilize the card for beneficial balance transfers with a lower or temporary no interest rate).

Your oldest card isn't always the best

It's true that the shorter your credit history is, the bigger the impact closing your longest line of credit may have on your credit score. Credit history is important (it's the third-largest component of your credit score), so if your first credit card was a good one, then by all means keep it open. But if it's a bad card, meaning it's got a high annual fee or if you're carrying a balance that's saddled with a high APR, you'd be wise to transfer the balance to a new, lower APR card and close the old account. There may be a small, temporary hit on your credit score but it will even out over time as you make progress paying on the new card.

Close a card the right way

If you'd like to be done with a card once and for all, but are nervous about the effect it will have on your credit score, there are tools you can use to asses the potential damage. Creditwise, a free tool and app from CapitalOne, lets you access your credit report and simulate how different actions will impact your credit score while allowing you to monitor activity going forward.

Then, when you're ready to close a card, make sure the account's balance is paid in full. Stop any automatic payments and transfer any reoccurring bills (gym membership, Netflix, etc.) to another card. Then you're ready to call your credit card company and request that the account be "permanently closed." This ensures that no new charges can be added to the account in the future. To ensure you have documentation of this, you can request that the company send you a confirmation that the account was closed with a zero balance, as well as that the company is reporting the account as "closed by consumer" to the credit bureaus.