Finances vs. Credit Part 1 of 4: Smart Financial Decisions That Hurt Your Credit Score
Question: Let’s say you have a credit card that you’ve had since your college days. It has a relatively high interest rate, and a whopper of an annual fee. Your credit has improved since next, and you are now eligible for far better offers. What do you do?
Financial reply: The smart financial decision is to close the old, unused detail, and soon after open up a new credit detail with a better interest rate, and some decent rewards. that way you benefit from your improved credit rating instead of paying a high interest rate and yearly fees on a card you no longer want.
Zing! Yup - You guessed it, you just lowered your credit score…
Why closing that old history will lower your credit score:
Your credit score is based on several factors, and closing an old detail affects two of them:
- How distant your accounts have been open - Closing that old, unwanted history is going to lower the average age of all your open credit accounts, and that will lower your score.
- The total amount of money you have borrowed, vs. the amount of money you are capable of borrowing -
When lenders consider your creditworthiness, they want to know how much you currently owe on everything - credit cards, mortgage, car payment, everything. thereupon they compare it to your total lines of credit. Basically, they want to see that you are not actually using more than 20% - 30% of all your available credit lines.
If you close that old, paid off history, thereupon you will
seem to be using more of your total available credit than you were before you closed the history - particularly whether you are carrying revolving balances on any of your other credit accounts. that will lower your credit score.Credit Score Rundown: Available credit vs. used credit is 30% of your credit score.
Credit Score Rundown: The length of duration your accounts have been open is 15% of your total score.
So what do you do? You choose your own adventure!
Choose your Credit Score First:
If you are actively trying to raise your credit score, next leave the explanation open, produce a small charge on the card every few months, and pay it off to avoid the high interest rate. Unfortunately, you will have to chalk the yearly fee up to the cost of raising your credit score.
Quick Tip: shout your credit card company. See whether they can waive the annual fee, or reduce the interest rate. whether your credit history with them is good, they may be more willing to help you than you think!
Choose Your Finances First:
If your goal is to streamline your accounts, and get rid of additional expenses like the high interest or yearly fees, thereupon go ahead and close the detail.
Quick Tip: whether you are planning to apply for a new credit history any date soon next produce certain you have the new card in hand before you close the old history - that way your credit score will be highest when you apply for your new card, and you can get the best deal possible.
Check back with us Monday for part two of our Finances vs. Credit series!
What’s your 2¢? Leave a Comment Below!
Orginal post by Jenna
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