Thinking of closing one of your credit cards? Read this whole blog before making that decision.
Your credit score is one of the most critical components of your total financial picture. A good credit score can usually get you better interest rates and terms, and lower fees on credit cards, auto loans, and your home mortgage loan.
Your credit score reflects your ability to pay and indicates to the lender the amount of risk involved in lending to you. The credit bureaus determine your credit score based on five factors. Each of these factors is assigned a particular weight.
The 5 Factors Used by Credit Bureaus to Determine Your Credit Score
- Payment history (35%) Are you always on time with payments? Or do you occasionally pay late or completely miss payments?
- Length of credit (15%) How long have you had each account and how much have you used them?
- Amount owed (30%) How many accounts do you have and how much do you owe on each?
- New credit (10%) Have you recently opened any accounts?
- Types of credit (10% ) What types of debt do you have? This could be credit cards, student loans, auto loans, etc.
Notice how the first two — payment history and length of credit — make up half of the total used to determine your credit score. A robust history of successful, on-time payments over a considerable period of time reflects your credit worthiness. For this reason, it’s important to think twice before closing out a credit card.
Repercussions of Closing a Credit Card
When you close out a credit card account, you not only give up access to valuable credit you could use to make purchases, you also lose that history of transactions demonstrating your ability to pay. By removing a chunk of your credit history, you can adversely impact your overall credit score and lose the benefits a higher score provides.
One way to avoid deleting that all important history (and do as little damage as possible) is to simply stop using the card. This way, your history and length of credit on that particular card remains intact and can be accessed should you apply for a loan. You also have that credit available to you should you need to use it in an emergency.
If you absolutely must close an account, avoid closing your oldest line of credit if at all possible. This will allow you retain some of the length and credit history you’ve accumulated over time.
Having and maintaining a good credit score requires discipline. To avoid damaging your credit and the need to close older accounts:
- Limit the number of cards you carry
- Don’t max-out credit cards
- If you can’t pay off a balance each month, double the minimum payment and stop using the card until you can.
- Don’t open new accounts to consolidate high interest debt — there are better ways to do this, including refinancing your mortgage.
- Don’t fall for point-of-sale offers of an additional 10% off your purchase if you open a new line of credit
A good credit score can have real benefits. Use credit wisely and remember — the better your score, the more buying power you have and the more you can possibly save.