Understanding Your Credit Card Accounts and How They Impact Your Credit Score
People who are struggling with credit card debt often come to the same conclusion – to avoid future debt, they decide they will close their credit card accounts. While this may seem like a good idea in concept, it can actually cause significant damage to your credit score. This in turn can lead to high interest rates on future loans or the inability to secure a loan at all. Managing your credit score is one of the most important things you can do to set yourself up for a bright financial future. Here we will take a look at the consequences of closing your credit card accounts.
Factors That Influence Your Credit Score
The composition of your credit accounts for about 10% of you credit score. Credit composition is the types of accounts you have opened. A good mix of account types positively impacts consumer credit. Some common credit accounts include:
- Auto Loans
- Home Mortgages
- Credit Cards
- Student Loans
- Personal Loans
Maintaining a varied mix of credit is important and one of the easiest ways to diversify your credit mix is with a credit card. Consumers should always have at least one active credit card account to maximize their credit scores.
Length Of Credit History
This factor is fairly self explanatory. Having older, established credit accounts improves your credit score. Closing a very old credit card would have a significant impact on the overall age of your credit history. This is why it is important to for consumers to establish credit accounts early in life and keep them in good standing. It is smart to keep your old lines of credit open and to regularly use them to ensure they remain active and in good standing.
This factor also requires little explanation. Many new credit accounts can have a negative impact on your score. Consumers should attempt to limit their new accounts when possible. Most financial experts recommend opening no more than 2-3 new accounts per year. This factor is relatively minor and many consumers report opening up new accounts has very little impact on their credit score. This factor would not apply to closing a credit card.
Past payment history is the single biggest factor which impacts your credit score. These easiest way to establish a reliable payment history is by making regular monthly payments on a credit card. Getting rid of your credit cards remove the opportunity to positively impact the single biggest factor that influences your score.
The easiest way to ensure a lifetime of good credit is to put all of your purchases on credit and pay off the full balance each month. This requires discipline. Leaving an outstanding balance on your card will result in high interest fees and should be avoided.
Amount Owed and Level of Debt
This is the second biggest factor which impacts your credit score. This is also one of the primary reasons people should avoid closing their credit card accounts. This factor does not merely account for your total debt. This factor also considers your credit utilization. We have previously written in detail about credit utilization. To summarize, credit utilization is the total debt you owe on your revolving lines of credit (credit cards) vs. your total credit limit.
When you close a credit card you are removing that entire line of credit. Any outstanding credit card debt will then have a much bigger impact on your score. Carrying a low percentage of debt is always going to result in a better credit score. For this reason, it is also recommended that consumers regularly request credit line increases to their existing cards. This will help ensure your credit utilization never rises above the recommended level of 30%.
Other Methods For Dealing With Unwanted Credit Cards
After reviewing all of the above information there will still be many people who still want to close their unwanted credit cards. The primary reason will be to avoid the “hassle” of having that account. However, there are many ways to reduce the hassle and maintain your peak credit score.
The easiest method is to simply pick a bill and use the unwanted credit card to automatically pay this bill monthly. You should then set up automatic billing for the credit card. Save your settings so that the entire monthly payment will be made in full directly from your bank account. This allows for easy budgeting. It also will maintain your existing line of credit and create a hassle free system of stellar payment history.
Another method for dealing with an unwanted credit card is to simply throw it in a draw and forget about it except for several times per year. Credit card issuers require you to maintain an active account. This means you will need to charge your card at least once or twice per year to keep your account open. Every few months simply put one charge on your card and then pay the balance in full.
Additional Resources – Top 30 Credit Card Blogs (Feedspot List)
ClimaTex was recently featured by FeedSpot as one of the Top 30 Credit Card Blogs! This list includes many of our favorite credit card blogs and provides tons of opinion and commentary on many of the top credit cards available for consumers.
Should You Open a New Card?
If closing a current credit card account is bad then perhaps opening a new card would be good. This is a very common conclusion many people arrive at. The answer is slightly more complicated but in many instances it is true a new card can help your score in the long run. As mentioned earlier, new lines of credit do have a small, negative impact on your score. For this reason, it is generally advised not to open to many accounts in a short period of time.
With this said, opening a new account will increase your total line of credit. This in turn will decrease your credit utilization. This is one of the primary factors impacting credit scores positively. Ultimately, a credit card is a responsibility that everyone needs to consider on their own. It is important to never go overboard and never extend your credit to the point where you are accruing debt. Many people open new cards for the big reward offers. These people also find that responsible credit use results in amazing credit scores.
What are your favorite credit card tips and tricks? Let us know in the comments below!