Over the last few years, Credit Reporting has gotten a lot of attention in the media. Part of it due to the Dodd-Frank Financial Reform Act, but I also give a lot of “credit” to the jingles of Freecreditreport.com. Although I love the commercials, I’m not a huge advocate of the website. Their idea of free is a little misleading.
Credit Bureau of Investigation
Regardless of where the attention stemmed from, it has been much needed. For those of you new to the adult-world, your Credit Score is your grown-up GPA. The only difference is that most people don’t really know what goes into the score and how it’s calculated. The reform laws have done a great job bringing some transparency into the system; however, most people aren’t aware of the resources available to them. Annualcreditreport.com is where you should be accessing your reports (I’ll expand on this in a later post).
The purpose of this specific post is to give a credit tip. Most Americans have multiple credit cards, which is fine. Most Americans have multiple credit cards that they don’t use, which is also fine. Most Americans (rightly so) believe if they aren’t using one of the cards, it’s best for them to cancel the card and close the account with the issuer. This is WRONG for the following reasons:
- Roughly 1/3 of your score comes from something called Revolving Utilization, also known as your Debt to Credit Ratio. Simply put, it’s the balances you carry on your cards verses the limits you have available. Once you get above 30% Revolving Usage, you’ll begin to ding your score. So think about this scenario: you have a combined balance of 1k on 2 cards, limits of 2k each, so you’re at 25%. You stop using one of cards so you cancel it. You just went from 25% to 50%, consequentially hurting your score.
- Another portion of your Credit Score is the length of your credit history. Let’s say you balance transfer to a new 0% credit card from an offer you received in the mail. Again, you decide to cancel your card. The card you cancelled, you had for 10 years. If these were your only two accounts, and the 10 year card was your longest tradeline, the length of your credit history went from 10 years to that of a college student.
I’ve heard numerous reasons why people wish to cancel a certain card, and in many cases I have agreed with their logic. My goal is for people to fully understand the costs and benefits associated with their seemingly logical actions.