A credit card is a little piece of plastic that can be a real lifesaver in an emergency. At the same time though, it can also drag someone down into a pit of financial ruin if not used properly. There is a lot to learn and understand when it comes to credit cards and your credit report. One important thing to understand is how closing a credit card or transferring a balance will affect your credit score.
Understanding Credit Scores
What’s a credit score? How are they determined? It’s different for everyone. Most scores are calculated by looking at whether or not a person pays their bills on time, if they have opened new cards frequently, and how much they still owe. If credit is issued and used regularly and responsibly, a credit score will rise and remain high.
In the financial world of credit, there is something called a utilization rate. This rate is calculated by comparing your total credit limit to the balance that is owed. It is essentially the percentage of your credit limit that is being used. All the credit information will be recorded and remain on the credit report whether or not an account is closed. It just states that credit was available and unused.
Be Credit Card Conscious
Imagine a sturdy table represents your credit score and each leg of that table represents a credit card. If the funds are never used on one card, but it’s an open account, that leg will remain strong because of no missed payments. If another card is closed, that leg will still be there, but it will be a bit shorter or wobbly because of inactivity. That’s where the credit utilization rate adjusts the credit score in a negative way and can make a rating look unbalance. But, as long as other cards are maintained properly, the sturdy table, your credit score, will have something to stand on.
Establishing a good credit history from the beginning will help in the future. A student or first time car or home buyer may need a little extra credit. Build a solid credit foundation. One credit card is sufficient if it has certain benefits, such as cash-back bonuses or zero or low annual fees. Don’t open new credit cards unless it’s absolutely necessary. The college years can be a financial minefield and too many credit cards with high balances can weaken the credit foundation.
It’s better to have a few good credit cards open than to close unused balances. Purchasing power is important. Not just to get a new pair of boots on sale or other instant gratifications, but because of the unforeseen. You should think of your credit as a security blanket. If there are medical emergencies or car repairs, it’s better to have a credit card activated and ready to use for such things.
If a credit card offer is too good to be true, don’t even open it in the first place. Just because a card offers balance transfers, it could turn into a financial mess if you don’t read the fine print. Good habits in budgeting and using borrowed money wisely will help to build a good credit history and maintain a good credit utilization rate.