Find out the right way to manage credit cards so you can build excellent credit scores and improve your personal finances.
ikewise, requesting a credit limit increase can boost your credit scores if your debt balances stay the same.
If you have plans to finance a big purchase, like a house or car, in the next year or so, don’t cancel any credit accounts. Jeopardizing your credit could ruin your chances for getting a low-interest loan and cause you to overpay interest for decades.
However, I don’t recommend that you keep a credit account if it tempts you to overspend. Taking a temporary hit to your credit might be worth it to prevent bigger problems in your financial life.
A quick and dirty tip: If you decide to close more than one credit account, space the cancellations out over several months so it doesn’t affect your credit scores at once.
Tip #2: Build a Long Credit History
Another tip you should know before getting rid of a credit card is that the longer your credit history, the better. One of the reasons young people struggle to build credit is because they have a short credit history. It takes time to accumulate a long file that demonstrates your credit-worthiness.
Many people are under the impression that if they close a credit account or pay off an installment loan that it immediately vanishes from your credit report. That’s definitely not true—your credit history sticks with you for up to a decade and that’s why it’s important to keep it as clean as possible.
Credit accounts with any negative information—like late payments or being in collections—stay on your credit report for 7 years from the date you became delinquent (with the exception of a bankruptcy, which can remain on your report longer). Accounts with positive information actually stay on your credit file longer—for 10 years.
When a closed account falls off your credit history, the average age of your open accounts drops and that’s why closing a good account can damage your credit. So never be quick to close an account with positive credit history—especially if you’ve already had it a long time. An active account stays on your credit file indefinitely, and if it has positive information it’s a boost for your credit scores.
Tip #3: Keep a Mix of Credit Types
Credit scoring models look at a variety of factors including whether your accounts are paid on time, your utilization ratio, and the length of your credit history. The third tip you should know before cancelling a credit card is that the number and types of credit accounts you have is also important.
To raise your credit scores you need to demonstrate that you can handle different kinds of credit, such as installment loans, mortgages, and credit cards. If you only have one type of account, your credit history could be considered too thin.
Therefore, never close a credit card if it’s your only credit card. You need at least one credit card in the mix to round out your credit file. Ideally you would have a total of 2 or 3 credit cards that come from different issuers, like Visa, Mastercard, American Express, or Discover.