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.

Should You Have a Credit Card in College?

I remember when my family dropped my older sister off at college seeing booths full of exited college students trying to get other college students to sign-up for credit cards.  To me, at the time, credit cards were the ultimate sign of financial irresponsibility. My dad would scoff at the students anytime one of them approached my sister. But now, as a college student who prides herself on her financial responsibility, I can give you a good guideline on when you should open a credit card for college.

Benefits of having a credit card

It’s helpful to have a credit score. It can help you with getting a good deal on loans, buying a house, or even landing a job. It also enforces good spending habits and teaches you to track your cash inflow/ouflow.

Also, having a credit card for longer increases your credit score.  The longer your line of credit has been open, the higher your credit score.

Negatives of having a credit card

If you’re not careful, any debt you have could quickly grow.  Many college students already have to worry about student loans, and don’t need the added stress of credit card debt.

So…Should you have a credit card in college?

You should get a credit card if you follow these criteria:

1.) You have a dependable source of income. (Or leftover income from a summer job.)

2.) You promise yourself to use it regularly, but sparsely.

Do not get a credit card if you want to use it to fund your way through college and expect to pay it off later.  If you have had trouble with excessive spending, practice budgeting yourself for a few months before you open a credit card.

What about for emergencies!?

Ideally, a credit card should not be your go to in case of an emergency.  Find a way to get a job and set aside money in a savings account in case of an emergency.  If you have an emergency that’s going to cost you a few hundred bucks, the last thing you’re going to want to do is use your credit card and have to deal with the interest payments.

Other Options

Become an authorized user.

If you are nervous about handling your first credit card, you can become an authorized user on your parents credit card. Before doing this however, you need to have a very serious discussion with your parents about how you will use the credit card and how they will use it.  Although parents can be quick to assume their children with start making excessive charges, if your parents start missing payments it will hurt your credit score too.

1.) Ask your parents to tell you their credit score.  Do your research on what makes a good credit score to decide how well your parents use their lines of credit.  Do not become an authorized user if you don’t trust your parents to make payments.

2.) Set a budget.  Have your parents give you a spending limit. This will get you into the habit of tracking how much you spend on a credit card.

3.) Know when to cut the cord. You can’t be on your parents credit forever.  Once you feel comfortable with your credit card, it’s time to think about opening your own.

Get a secured credit card.

Did you know there is more than one type of credit card? Secured credit cards require you to put down a deposit, the size of your deposit will then decide how much credit you can draw from. For example, if you put down a $300 deposit, then you will have a $300 credit balance each month.  Forget to pay, however, and the bank will take your deposit as collateral. Although losing a $300 deposit may seem like a lot of money, trust me, it’s better than facing the compounding interest on a regular credit card. After using your secured credit card, you can upgrade to a regular credit card.

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?