Most people strive to maintain a good credit score. However, many people don’t realize that their credit score can be negatively impacted by certain credit card maneuvers that may seem innocuous. To gain an understanding of why these actions are problematic, it’s necessary to learn about some of the factors that contribute to the determination of a credit score.
Here are four recommendations for managing your credit cards in a way that avoids damaging your credit score, along with explanations of why the specified actions are unwise.
1. If possible, avoid cancelling credit cards. You may have very good reasons for wishing to cancel a credit card – to transfer the balance to a card with a lower interest rate, or simply to eliminate the temptation to use a particular card. Nevertheless, however good your reasons, the best solution is rarely the cancellation of the card! When you cancel a credit card that you have held for several years, you are reducing the length of your credit history – which results in a lowering of your credit score. In addition, cancelling a card has the effect of reducing your total available credit limit, which increases the all-important “utilization percentage” (the proportion of available credit being used). This too results in a lowering of your score. Instead of cancelling, it is advisable to hold onto your old credit card(s).
2. If you must cancel a credit card, do so carefully. It is best to cancel the card with the lowest credit limit. This reduces the negative impact on your credit score by minimizing the reduction in your total available credit limit. Also, ensure that you have fully paid off the card balance before closing the account. Finally, when you contact the financial company to close the credit card account, instruct the representative to report (to the credit bureaus) that the account was “closed at the customer’s request.” The reason listed for the closure of an account is very important. If the financial company reports that the account was “closed by the creditor,” your credit score will be downgraded.
3. Limit the number of credit card applications that you submit. If you need a new credit card, it’s best to avoid sending more applications than necessary. In fact, if your credit record is good, you should only need to submit one. Each credit card application results in a “hard” inquiry to the credit reporting bureaus. Such inquiries lower your credit score. Adding a new credit card has a negative effect on your credit score for another reason also: it lowers the average age of the accounts in your file.
4. Avoid maxing out a credit card. Perhaps you are attempting to control your borrowing by using only one credit card. If this strategy results in your balance approaching the credit limit for the card, it’s a big mistake! Experts say that using anything beyond 30 percent of a credit card’s limit can affect your credit score. Also, keep in mind that flirting with the upper limit is dangerous because going over the maximum damages your credit score and may trigger the imposition of a higher interest rate.
Managing credit cards effectively is an important part of maintaining a good credit record. To do so requires more than good intentions: it requires a clear understanding of the factors affecting a person’s credit score. The tips and explanations provided in this article can serve as a valuable introduction to the proper handling of credit cards.