Sometimes, spending more energy can work to your advantage.
- It’s common to open a new credit card when you’re making a lot of purchases.
- You may no longer need the overdraft you recently opened, but that doesn’t mean closing that account is your best bet.
The holiday season is when many people increase their purchases, and understandably so. If you wanted to increase your holiday shopping power last year, you may have made the decision to open a new one. credit card.
But what if you’re back to your regular spending habits now, but you don’t see yourself using that credit card in the future? You might want to close that account. But doing so may have a negative effect on you credit score.
Closing a credit card can hurt you
The length of your credit history plays a role in determining your credit score. And closing a credit card that you’ve had open for a long time can result in a scorecard.
In this case, however, you are not talking about closing an old account. But, you are talking about closing a credit card that you recently opened. And canceling an account that’s only been open for one month shouldn’t be a big deal from a long credit history.
But closing your credit card doesn’t mean it’s the right call. That credit card could be helping your credit score, even if you don’t realize it.
Another big factor that goes into calculating a credit score is utilization, or the amount of available credit you’re using at one time. In general, a debt ratio 30% or less will do great things for your grade point average. But once your utilization rate exceeds the 30% mark, your credit score can take a hit.
So, let’s say you opened a new credit card during the holidays with a $3,000 spending limit, before that, your spend $10,000 on your old cards. You may be sitting on a $3,500 credit card balance due to carrying old debt forward and adding to your total over the holidays.
If you’re looking at a credit limit of $13,000 on your various credit cards, a balance of $3,500 puts you at 27% leverage. It’s below the door where you start crawling into the danger zone.
But look what happens when you close that new credit card. All of a sudden, you’re looking at a credit utilization rate of 35% because of your lower total limit, which isn’t what you want.
That’s why hanging on to a credit card you don’t think you’ll use often can make sense. If you close, you can damage your credit score for no good reason.
Find a safe place for a rarely used credit card
You can carry your credit cards in your wallet so they are available to swipe at any time. If you don’t see yourself using your credit card anytime soon, don’t keep it in your wallet. But, keep it in a safe place. If you lose your wallet, you’ll have one less card to worry about.
If you have a safe at home, put your credit card in it. Otherwise, find a secure place that you can remember to check in case the need arises to use the credit card.
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