If you're about to apply for a home loan and have bad credit, you're probably trying to find ways to raise your credit score before you do. Is there an ideal number of credit cards to maximize your credit score? And is there such a thing as too many credit cards?

Featured Credit Card

A common rule-of-thumb claim is that the ideal number of credit cards ranges from three to eight or more. In reality, the number of credit cards you have is less important than the age of your accounts, your payment history and the amount of debt you carry.

Reason codes and your credit history

FICO credit reports -- FICO being the creator of the most widely used credit scoring system in the U.S. -- contain "reason" or "adverse action" codes that explain why your credit score was lower than the best possible. There are many, many reason codes, and the top four negative factors influencing your score are listed. Here are several:

  • Amount on recently opened accounts is too high
  • Lack of recently established accounts
  • No recent balances
  • Length of time accounts have been established is short
  • Time since account activity is too long
  • Time since account established too short
  • Proportion of balances to limit is too high

Codes for "too many accounts" have been abandoned and are no longer in use. One could probably assume from that that having "too many accounts" is no longer a significant factor in determining your credit score.

What's in your wallet?

Determining the best number of cards for your credit profile involves examining your mix of cards. For example, suppose you have five cards, each with $1,000 limits and a total balance of $2,500, on average ten years old. Should you close a couple of cards? Should you open a couple of new accounts? Consider:

  • Closing a newer account could increase the average age of your open accounts, which should improve your score.
  • However, closing accounts without paying off any of your balances would increase the percentage of available credit used (i.e., increase your credit utilization). While $2,500 of $5,000 total available credit is only 50 percent, $2,500 of $4,000 is 62.5 percent. This could drop your score.
  • Opening up a new account has the opposite effect. On one hand, adding available credit without adding to your balance gives you a better ratio of balances to available credit. However, new cards mean a shorter average account age, and a newly established account nearly always causes your score to drop in the short term.

Time off for good behavior

One thing the codes make obvious is that credit is like muscles -- you need to use it or you lose it. FICO likes to see you using your accounts and paying them on time. If you've been good about this, you may be able to get an increase in your credit lines without opening up new accounts. That improves your profile without the credit score dings.