A lot of us carry more than one credit card –a main card used for regular purchases, and other cards that are only used once in a while. Maybe you opened a credit card at a retailer in order to get a discount on a large purchase, but haven’t been in the store since. Or you may have cards that carry higher interest rates than the one you use now.
When trying to get spending under control, it might be tempting to close those little-used credit card accounts and keep it simple. One card. One monthly payment.
Some experts suggest that you keep those older credit cards for the sake of maintaining a high level of credit worthiness, and a better credit report.
Do You Use Your Credit Availability?
As a credit card owner, you have a certain amount of credit available to you – the total of all card limits, and maybe a home credit line, as well.
Closing a rarely-used credit card lowers your total available credit – credit you might need in a cash flow emergency.
Keeping those old credit cards active increases the cash and buying power you may need in case of serious problems – a house fire, flood, loss of a job, unexpected medical expenses – all of these contingencies may be more easily managed when you have enough available credit.
Further, part of your credit score is calculated on your credit utilization ratio – the percentage amount of available credit that you actually use. If you have three credit cards, each with a $5,000 credit limit, you have $15,000 of available credit, less any outstanding balances, of course.
To keep your credit in good standing, lenders like your actual credit liability to be less than 30% of your total available credit – in this case, credit card debt no more than 30% of $15,000, or $4,500. When you owe more, traditional lenders – typically lenders with the most attractive interest rates – may become more leery about lending.
There’s another key factor in determining your credit score – the actual amount you owe at any given time. Credit experts suggest that as much as 30% of your total credit score is based on two factors: your credit utilization ratio, and the amounts you owe on the different credit cards you carry.
It may be good to carry small balances on several credit cards and keep balances low. On the other hand, if you’re over-spending – putting it on plastic – closing a credit card account forces you to discipline your spending habits, and gradually work your way out of debt.
A heavy debt load on lots of different credit cards weighs down your credit score. If you exceed 30% of your available credit – greatly exceed it, and for an extended period of time – your credit score may drop, and your credit report looks less attractive to potential lenders.
The Bottom Line
The bottom line is your personal bottom line each month.
Keep old credit cards active to maintain a higher level of available cash and credit in case of emergency. The last time you want to apply for a new credit card is when you have an emergency. So keep your available credit for whatever life sends your way.
Keep your debt limit no higher than 30% of your total available credit. Add up the credit limits on all your credit cards, add any lines of credit, and keep your total debt below that 30% threshold – your credit utilization ratio.
The exception to keeping old credit accounts active? When you’re debt-heavy, paying minimum credit card balances and losing sleep over how much you owe, it may be a good idea to close some credit card accounts.
Talk to your local banker about your credit history, and where you stand in the eyes of lenders. You may owe too much, or you may not owe enough, believe it or not. If your credit utilization ratio is zero, you may not have enough payment history for lenders to accurately evaluate your credit-worthiness.
Keep your credit history clean, and within the comfort zone of lenders, to fully and effectively enjoy the credit you’ve worked so hard to build.
The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice.
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