Is it Good to Close Credit Cards?

Yes! But also, no! Like everything, it depends on your financial situation.  You may think about closing a credit card that you don’t use anymore, but that could hurt your credit score.

Pros:

Closing your card gives you one less credit card to worry about.  Whether you worry about missing a payment or having the card lost/stolen.  If you have one card that you consistently miss payments on, it’s probably best to just lose the card.

Cons:

Your credit score increases the older it is.  If you close your oldest credit card, your credit score will likely drop.

Also, dropping the card will decrease your overall available credit.  That means any credit you do use on other card will have a larger effect on your total credit usage; which is a number you ideally want to keep low.

Alternatives:

Instead of dropping the card completely, you could make a single purchase once every few months.  Don’t ignore the card completely, or the bank will close the card for you. If you have some other credit cards that are about the same age, then it shouldn’t affect you too much to drop one. I would just try to keep my oldest card, until my next oldest is at least a couple of years old.

Hard vs. Soft Credit Inquiry

Creating an accurate credit score is a very complicated process. Many things decide your credit score, including those unrelated to making payments.  One thing credit card companies don’t want to seeis  someone gaining too much credit too quickly.

Quickly trying to open many lines of credit could be a sign that someone is heading into financial trouble or may be taking too many risks.  In order to track how often people are checking or changing their credit,  credit bureaus classify it as either a hard or a soft credit inquiry.

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A hard inquiry affects your credit score negatively.  It tells the credit card company that you are trying to increase your lines of credit.  Hard inquiries appear if you open up a new credit card, try to get approval for a loan, apply for a mortage, etc. Generally, you will have to approve a hard inquiry, but that is not always the case.  Luckily, hard inquiries have a small effect on your credit score, and the effect lessens over time.  If you find yourself having too many hard inquiries, the best option is to wait them out and keep your credit payments up to date.

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Soft Inquiries have no affect on your credit score.  Soft inquiries occur when you track your credit or sometimes when a company asks to check your credit score.  Some credit bureaus do keep track of the soft inquiries into your credit, but they do not affect your credit score and should only be visible to you.

How to know if someone will perform a soft or hard inquiry?

If the company asks your permission, it is likely a hard inquiry.  Don’t fret however, because a single hard inquiry will have a very small effect on your credit score.

 

First Credit Card Mistakes To Avoid

Getting your first credit card can be a scary experience. Credit card debt can grow exponentially if you’re not careful and can affect your ability to buy a car, a house, or even get a job. Ideally, spending money you don’t own is never a good idea, but it’s not always practical.  Whether for building credit, or making end of month payments, here’s the most common credit card mistakes new credit card users make.

1.) Carrying a balance month to month.

I’m not sure what started this myth, but it is NOT TRUE. Carrying a small balance from one month to the next does not help increase your credit score.  For the best results, pay off each balance in full at the end of the month.

3.) Ignoring your credit utilization rate.

Even if you pay off every cent each month, you may still be hurting your credit score.  Credit companies also like to track that you are not using too much of your available credit.  Although this has less of an impact on your score compared to other things, lenders want to see that although you have credit available, you are not in a position to be using too much too often. If your credit utilization is above 30%, call your bank and ask for a raise in your available credit. This way, you can keep your spending the same and reduce your credit utilization. However, raising your available credit may result in a hard inquiry.

4.) Too many hard inquiries.

If you apply for a new credit card, increase your available credit, or apply for a loan, you will likely have a hard inquiry reported on your credit report.  A hard inquiry negatively affects your score because it shows that you are gaining too much credit too fast.  Don’t worry, because a hard inquiry is only reported for about 2 years.  Checking your credit score for non-lending purposes (like if you are using an app such as CreditKarma), is a soft inquiry and will not affect your credit score.

5.) Not tracking your credit.

In this day and age, there is absolutely no excuse for not knowing your credit score. Tracking your credit score is the best way for you to learn how changes in your spending affect your credit.  It is also important because the credit bureau might make a mistake in your credit that could go undetected until you need to take out an important loan.  You can dispute errors on your credit card, but only if you find them.

6.) Overvaluing the rewards.

Almost every credit card company offers rewards based on how much or where you decide to spend your money.  Any program that encourages you to spend money in order to make money should make you very nervous. Credit card companies offer rewards because they know it encourages most consumers to spend more money than they initially would.  A 3% cash back rewards may sound like a lot, but often times you will spend more than 3% in anticipation of rewards.

 

What’s been your biggest credit card mistake? What helps you stay on track of your credit?