It’s more important than ever to take care of your credit. But what’s good for your credit score isn’t always obvious (or logical).
For instance, many people think it’s a good idea to close credit card accounts to boost their credit score. Not true! Part of your credit score is determined by how much credit you use compared to how much credit is available to you (it’s best to have ample credit available to you, but only use a small proportion of it). If you close accounts, your total credit limit goes down and as a result, so does your credit score. Plus, if you’ve had that card for awhile, you’re effectively eliminating that long credit history, which also negatively affects your score.
Here’s a great Credit Cards 101 article from Real Simple, which answers a lot of common questions about credit cards and credit scores. Among some of the pointers:
Opening a bunch of store credit cards in a short period of time will negatively affect your credit score. I know, we all want the super-saver discounts that often accompany opening a store credit card, but ask yourself this: is it better to save a few bucks in one day, or potentially thousands of dollars over the course of a year? The better your credit score, the better the rates and terms offered to you by creditors and lenders, which could translate to major savings over time. That’s not to say you shouldn’t ever open store credit cards; just be selective and try not to open several in a short time-span.
Spread your credit out over a few cards rather than reserving a large balance for just one card. It’s never a good idea to come close to maxing out a credit card. It tells creditors and lenders that you can’t responsibly manage your credit. Instead, Real Simple recommends keeping small balances on several cards. However, if you don’t use a lot of credit in the first place, it’s completely fine to keep your total (smallish) balance on one card. The key is to keep the credit you use compared to the credit available to you low on any one card (and low overall).
Transferring a balance from one card to another frequently is just fine. Doing so won’t help your credit score, but you may save mucho dinero in interest. Just make sure you’re not opening up new cards all the time for the balance transfer deals and know what you’re getting into. Many credit card companies offer low teaser interest rates for balance transfers, but these often come along with a cost (such as initial fees, like 3 percent of the transferred balance). And of course, it’s best to focus on paying off your debt rather than expending time and energy transferring it around.
Ultimately, what’s good for your credit is good for you. So make it a New Year’s resolution to take better care of your credit. By doing so, doors will open to you.