How to choose the best credit cards for your wallet

Hand holding credit cards

There's a good chance you've got too many credit cards in your wallet.

Many people accumulate cards by chasing introductory rates and special offers. Before you know it, you could have a wallet full of unused cards that could complicate your life and hurt your credit score.

If you choose the right cards in the first place, you'll only need two or three.

Our 4-step plan helps you step back, take stock and snag the cheapest fees, lowest rates and most valuable perks.

By simply reducing the number of cards you carry, you will:

* Save possibly hundreds of dollars annually by eliminating cards that charge annual fees.

* Help limit impulse shopping.

* Save time and money when paying your bills. You'll also be less likely to be late on a payment, avoiding late fees and potential interest rate increases.

* Be less susceptible to identity theft.

* Possibly improve your credit score.

Your goal should be to own and carry only two -- absolutely no more than three -- credit cards.

Just follow these steps to separate the winners from the losers in your billfold or purse:

Step 1. Pick a bank card that has the lowest interest rate and no annual fee.

Start by looking at your Visa and MasterCard statements to see which of your existing cards has the best rate.

Then go to our listings of the best credit card deals to see if you can find a cheaper offer.

With average or better credit, your goal should be a card that charges less than 14% annual interest.

It should also have no annual fee and provide a reasonable credit limit.

Step 2. Pick another card that offers your favorite type of reward.

We think cash rebates are the best rewards. There are no strings attached, no blackout dates and no possibility that you won't be able to use your reward.

Cash is cash, and you can use it to reduce your balance, put it in your savings account or buy your own reward with it.

But if you love to travel, then go with a card that rewards use with free airline tickets, cruises or hotel rooms.

If shopping is more your thing, choose one that allows you to earn points toward purchases at a favorite store.

Just remember: Card companies are getting stingier with their rewards, especially airline miles. Check the fine print and the potential for actually getting those rewards before you dive in.

Your rewards card can be another Visa or MasterCard, or perhaps an American Express, Diner's Club or Discover card.

Don't be surprised if it imposes an annual fee and higher interest rate than the first bank card you picked.

Avoid store credit cards that can only be used at one retailer. They are not flexible enough, and their reward programs tend to be subpar.

If you need a better sense of what's available, or want to do some comparative shopping, take a look at our listings of the best deals on reward cards.

Just remember that if you're using a reward card, you need to pay the balance in full every month. Otherwise, the interest you'll pay could wipe out the benefits of any rewards.

Step 3. Keep the winners -- ditch the losers.

Once you have your keepers, put them in your wallet and consider dumping the rest.

The only exception might be a second low-interest, no-annual-fee credit card that you put in a drawer at home to use in emergencies, such as when you lose your wallet.

But three open accounts is the absolute limit.

Cut up all of your store and oil company credit cards and fight the urge to keep any cards because they bestow some kind of prestige on their owners.

Transfer any balance on the cards you're getting rid of to the one you're keeping that has the lowest interest rate. Then, cancel those accounts.

Closing credit card accounts can have a small and usually short-term effect on your credit score.

It can be a bigger impact if it's the first credit card account you opened. That's because it establishes the length of your credit history.

So, if you have to close a number of accounts, start with those that charge an annual fee and then move on to the ones you opened most recently.

If there are extra accounts you just can't bring yourself to close, take the card out of your wallet and put it in a lockbox.

Ultimately, the benefit of getting all of those costly, store-specific credit cards out of your wallet outweighs any drawbacks.

Cut 'em up and simplify your life.

Step 4. Use your cards wisely.

Charge everything you can pay in full each month on your rewards card and pile up the points.

That includes any work-related purchases that you'll be reimbursed for by your employer.

Any big purchases that you can't pay off right away need to go on your low-interest card. If you're going to carry a balance, this is where you want to do it.

Here are some tips on how to curb credit card spending.