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Do you really need a credit card? Is it a wise idea to close one, or all? Oh, and how many should you have? By the way, does the way you use your card affect your credit score? And the list of complicated questions goes on, and on. Yes, credit cards can be tricky, and while the majority of the global consumer market would absolutely agree that you need a credit card to, well, pay for stuff and earn rewards, those who are inexperienced in the matter can have a difficult time wrapping their heads around the whole idea.
Worry not, it’s not as complicated as it may seem at first glance. In fact, today we’ll be giving simple and straightforward answers to some of the common questions and problems that card holders and those who aspire to become card holders one day have. Here are the five tips on credit cards and how they impact your creditworthiness.
The max number of cards you should have
Card issuers are always delighted to give you a new credit card. But you’re not Snow White, and thank god you’re not as gullible. While there’s nothing wrong with owning multiple credit cards per se, it’s important that you do your own research before getting a new one, compare your options, and of course, reassess your spending habits. Doing this will give you a comprehensive overview of your financial situation, and how your cards are affecting your ability to get a loan or a mortgage.
Next, be sure to keep in mind that, as long as you don’t charge up your cards past their limit, having more than one card can actually help your creditworthiness because you are effectively expanding your credit capacity. That said, also keep in mind that you shouldn’t open new cards in a short timeframe, as part of your score is calculated by the “new credit” criteria, which can total up to 10%.
How closing a credit card affects your credit score
Using credit cards, opening new accounts, closing old ones, all of this can affect your credit score in the long run, in a couple of ways. Firstly, it’s important to know that your long-term credit score will be calculated with the age of all your revolving credit accounts. This means that your score will be higher the older your accounts get, which is a pretty easy way to rev up your credit score because it has nothing to do with your spending habits, provided that you have a healthy credit history.
That said, if you decide to close a credit account, you will reduce the number of accounts the bank uses to calculate your credit score. There is a long ten-year period before the account is officially swiped from your record, though, but it is nonetheless something you need to keep in mind, especially if you don’t want to affect your credit utilization ratio in a negative way.
The importance of comparing card options
Just choose the first card that you’re offered by the first issuer you get in touch with, right? Well, no. The worst thing you can do is to spring for the first card that is offered to your without first conducting a thorough credit card comparison with your own research, and from multiple issuers on impartial, third-party websites. This is the only way to get a bird’s eye view of all of the available options, their credit limits, as well as the perks and rewards the issuer has to offer. Naturally, the choice you make will influence your long-term credit score, so take your time and find the ideal plan for your financial goals and aspirations.
The order in which you should close your accounts
While you are free to close any account you wish, in any order you choose, there are a couple of considerations you should keep in mind that will affect your overall credit score. First and foremost, it would be a wise idea to close your newest accounts first in order to keep your overall age of credit relatively unchanged. Secondly, you can close the card with the highest interest rate first, and you can even try to transfer the balance to a low-interest card to minimize financial waste. Lastly, be sure to eliminate cards with annual fees as well.
Alternatives to cancelling a credit account
There is no denying that the best candidate for cancellation among all of your credit cards is the one with the highest interest rate and the lowest limit. That said, keep in mind that cancelling a card doesn’t have to mean cancelling an entire account. In the case that you qualify for a lower-fee card, you could get in touch with your issuers and transfer to a new card but without losing your payment history. Also consider keeping the card, even if you don’t use it, in order to maintain your age of credit. Simply put a small recurring payment on that card to avoid having it cancelled.
Wrapping up
The way a credit card impacts your financial standing or your credit score is highly dependent on your spending habits and the type of card you choose, so it’s important to stay in control of your spending, and compare all of the available options. If the time does come when you decide to close a credit account, though, be sure to keep these tips in mind to minimize risk and maintain your credit score.
