Chapter 1. Can Cancelling a Credit Card Affect My Credit Score?
Cancelling a credit card will affect your credit score, especially if you have had that card for several years. 15% of your FICO credit score is based on how long you have had that line of credit. The older the better. Once you cancel that card, you will lose that long history you had with the card and your score will go down.
Chapter 2. How Do Credit Cards Affect My Credit Score?
Credit cards affect your credit score with two factors:
- The balance on the credit card accounts for 30% of your FICO credit score. Anytime your balance exceeds 50% of the available credit, your credit score will be reduced due to a high utilization factor. The best case scenario is to keep the balance on your credit cards at 30% or less in order to take maximum advantage of your growing credit score.
- The age of the credit card. The longer you have maintained that credit card the better the impact on your credit score it will be. Length of credit history accounts for 15% of your FICO score.
Chapter 3. What If I Need To Close A Credit Card?
There may be instances where you really do need to close a credit card or perhaps you have too many cards and want to get rid of some. When scrutinizing which cards to close, look first at the cards that are the youngest (you haven’t had them for very long). And look at the cards that are closest to their limits. If you can pay those cards off, then close them, it will increase your overall utilization ratio and help your credit score. And because you are closing a newer card, your impact on the length of credit history on that card will be minimal.
Chapter 4. How Many Credit Cards Should I Have? Is It Possible To Have Too Many Cards?
It is possible to have too many credit cards. It is difficult to say exactly how much credit is too much or how many credit cards are too many. FICO guards its algorithms very carefully, so it’s difficult to tell what these thresholds are. As a good rule of thumb, you will want to maintain around 3 to 4 credit cards.
Chapter 5. Does Applying For Credit Hurt My Credit?
Yes, applying for credit does hurt your credit. Anytime you fill out a loan application, that lender pulls your credit report which causes an “inquiry.” These types of inquires are known as “hard inquiries.” They affect your credit score by about 10%. It is possible to even be denied credit because of too many inquiries. So it’s very important to not frivolously apply for credit you don’t actually need. On this website, we have a great place you can take a look at some great credit card offers.
Chapter 6. What Is A Good Credit Score?
The FICO scoring model ranges from 300 to 850. Scores from 680 to 699 are considered “good.” Scores from 700 to 720 are typically considered “excellent.”
Chapter 7. Does Not Using A Credit Card Hurt My Credit?
By not using your credit card on a regular basis, banks could cancel the credit card because of lack of use. If the bank closes your credit card, it also does hurt your credit. A simple practice I tell my clients is to just put a tank of gas in your car once a month, then pay it off. That way it shows current usage and payments.
Chapter 8. In Summary
Credit cards at the fastest way to build your credit and the fastest way to kill your credit (through misuse). It’s vital that everyone understands these basic principles and the impact they will have on your credit score and ultimately on your financial future.