Everyone is aware too much credit card debt can really hurt your credit score. Even cause you to be unable to pay your monthly bills. But are you aware having an inactive credit account, balance transfers, and closing old credit card accounts can cause your credit score to go down significantly?
Find out how you can prevent a significant down turn in your credit history without realizing it!
Have a question?
Subscribe or email me
at ask@howtobudgetnow.com.
[mc4wp_form id=”77″]
Too Many Credit Cards
Ok, I know the question that is rolling around in your brain right now. How many credit cards are too many? Are you ready for the answer?
There is no exact number given to this question.
Basically, what it means is, how much credit do you have access to in comparison with how much money you make in a year?
For example: if you are currently making $30,000 per year, you have 6 credit cards open, and the combined total credit limit of those credit cards is $15,000. This is going to bring your credit score down.
In this situation you are able to borrow half of your pre-taxed income.
If you were to completely max out all of those credit cards you would have 6 different interest rates. You are basically borrowing your own money with interest. It would take you years to pay off that kind of debt…if ever!
Too many credit cards could also lead to opening too many accounts within a short period. A good rule of thumb is if you have to open more than one credit account in a year open those 6 months apart from each other.
Keep in mind auto loans, a mortgage, student loans, etc. count as credit accounts.
Also, be careful with how many credit inquiries you have on your credit history. Every time you are ran for a pre-approval upon your request it will show on your credit history.
When I was looking for a low rate mortgage loan I only had two companies run my credit history for a per-approval. They both asked why my account had been looked at and by whom.
In this situation when they realized I was mortgage broker shopping I suddenly started getting better interest rate offers from them.
Only having a few credit inquiries can actually work out well for you in certain situations.
Have a question?
Subscribe or email me
at ask@howtobudgetnow.com.
[mc4wp_form id=”77″]
Closing Old Credit Card Accounts (Even store credit)
Before closing any of your credit card accounts review your situation before actually doing so.
- Review how long it’s been since you opened the account.
- Look at your credit score to see where you stand.
- Review your shopping habits.
If you can’t have an open credit card in your possession without maxing it out then by all means close an account or two. In certain extenuating circumstances it is better to close an account than to leave it open.
If you have a great credit standing in the 700 to 850 range consider leaving the account open and only using it occasionally.
When you close a credit account your credit score will go down because it makes it appear you can’t handle owning the credit line. Creditors think if you were to max out the credit card then you wouldn’t be able to pay it back.
I know, this is crazy, sometimes you want to close an account due to the card no longer meeting your needs from an awards perspective or maybe the annual fee is too high.
But if this is an account you have owned for 10 years or more think twice before closing.
Closing a card you have had for years will shorten your credit history significantly. If your other accounts are younger than 5 years then creditors aren’t going to see a strong money manager. It could even affect interest rates you are offered in the future.
Now if the credit card account was only open for a year or two you aren’t going to see a large decrease in your credit score when you close it. It may dip for a year by 5 to 10 points but that is all.
Only avoid closing extremely old credit accounts.
Have a question?
Subscribe or email me
at ask@howtobudgetnow.com
[mc4wp_form id=”77″]
Inactive Credit Card Accounts
I’ll be honest; this one is going to be a little shocking to you.
An inactive credit card account can actually hurt your credit score. The main reason why is because banks have an inactivity close date on the credit accounts they offer.
You know the saying when learning a foreign language? “If you don’t use it you lose it.”
This is along those same lines. A majority of banks will close a credit account after 12 straight months of inactivity.
It’s the closing of the account that hurts you credit score. Remember what we just talked about? 🙂
Protect your credit utilization at all costs! (See “When credit cards help your finances for more detail here)
You want to make sure you are maintaining credit activity that is below 30% of the total credit line you are approved for. This is referring to all of your credit lines combined, not each individual card.
Now if all of your credit cards are at zero they all are in danger of being closed. Potentially most of your credit history could be lost.
In order to prevent this from happening just charge something to each account that you normally buy every month.
Make sure that what you charge you are able to pay off in full by the end of the month. You don’t want to wind up paying interest on all of those cards.
Have a question?
Subscribe or email me
at ask@howtobudgetnow.com
[mc4wp_form id=”77″]
Balance Transfers For a Better Interest Rate
Last but certainly not least…credit card balance transfers.
I left this one for last because we needed to discuss the 3 previous subjects first.
When you are trying to get pre-approved for a 0% balance transfer promotion on another card there are several aspects that get dinged on your credit score.
For one, the pre-approval check is going to show on your credit history. Be careful not to apply to too many cards with this type of promotion at the same time.
Also, a balance transfer really isn’t worth it unless you can transfer the entire carrying balance you want to pay off. Don’t try to open multiple credit cards to achieve this.
Don’t close the credit card account you are transferring the balance from especially if it is an old account.
Finally, be aware that even though it is a 0% interest account if you max out the entire balance you are still risking increasing your credit utilization percentage above the 30% recommended threshold.
You are safe from maxing out your overall combined credit limit as long as the previous card stays open.
However, as mentioned before if you are more on the “spender” type of personality it may be best to close the account you are transferring the balance from, especially if it is a high interest rate.
Concluding Thoughts
There is no exact number defined for holding too many credit cards. Just make sure that the combined credit limit on all of your cards stays under the 30% max amount. You always want 30% of the balance to remain unused.
Don’t close credit card accounts, especially if they are 10 years or older. This will shorten your credit history as well as lower your score.
This can hurt your chances of getting good rates or loan balances on vehicles and homes.
Be careful leaving your credit card accounts inactive. I know that a zero carrying balance on a credit card should be a good thing.
But most banks close inactive accounts after 12 months. So charge something you normally buy and that you can pay in full by the end of the month.
Finally, don’t let balance transfers damage your credit score.
Some guidelines to follow:
- Don’t close the account you are transferring funds from.
- Don’t allow too many companies to run credit inquiries for pre-approvals.
- Don’t apply to multiple cards at the same time (6 month rule).
- Don’t open multiple credit cards to take advantage a 0% interest balance transfer offer.
If you can’t transfer the entire balance of a high interest credit card to the 0% interest card it really isn’t worth opening the new card. The entire point is to get some relief from interest payments with this method.
***
Do you have a question you would like an answer to but can’t seem to get a straight answer?
I would be happy to help! The blog you read today was created to answer another reader’s question. I created this blog in order to use my 8 years of accounting experience/knowledge to help you understand your finance questions.
You can either subscribe below then click reply to the welcome email to ask your question or email me at ask@howtobudgetnow.com.
If you subscribe you will not only receive my newest blog by email every Wednesday but you will also get a free copy of my ebook teaching you how to make more money without a raise or a second job.
I can’t wait to hear from you!
[mc4wp_form id=”77″]
Subscribe and you'll receive our weekly posts right in your inbox. You'll also be one of the first to be notified when our free budget course opens. Hope to see you there!
