Sometimes, more buying power can work in your favor.
the main points
- It’s common to open a new credit card at a time when you’re doing a lot of shopping.
- You may no longer need the supplementary card you recently opened, but that doesn’t mean closing that account is your best bet.
The holiday season is when a lot of people tend to ramp up their shopping, and understandably so. If you wanted more buying power during the holidays last year, you may have made the decision to open a new credit card.
But what if you fall back into your regular spending routine now, and don’t see yourself using that credit card in the foreseeable future? You may be tempted to close this account. But doing so could have a negative impact on your credit score.
Closing a credit card could hurt you
The length of your credit history plays a role in determining your credit score. Thus, closing a credit card that you have opened for a long time may result in a credit score.
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In this case, though, you’re not talking about closing a long-term account. Instead, you’re talking about closing a credit card you recently opened. And canceling an account that has only been open for a month or so shouldn’t be much of a problem from a credit history perspective.
But that doesn’t mean closing your credit card is the right choice. This credit card can still help your credit score, even if you don’t realize it.
Another big factor that goes into calculating a credit score is utilization, or the amount of available credit you use at once. In general, a credit utilization ratio of 30% or less will do good things for your credit score. But once your utilization rate crosses the 30% mark, your credit score has the potential to take a hit.
So, let’s say you open a new credit card over the holidays with a spending limit of $3,000, and before that, your spending limit across your old credit cards was $10,000. You may have a $3,500 credit card balance due to carrying old debts forward and adding to your total balance over the holidays.
If you’re looking at a $13,000 credit limit across your various credit cards, a balance of $3,500 gets you about 27% utilization. This is below the point where you start to creep into the danger zone.
But watch what happens if you close your newly opened credit card. All of a sudden, you’re looking at a 35% credit utilization ratio due to your overall limit shrinking, and it’s really not where you want to be.
This is why sticking with a credit card that you don’t think you’ll use often can make sense. If you close it, you may damage your credit score without good reason.
Find a safe place to get a credit card you rarely use
You can carry your credit cards with you in your wallet so they are available for swiping at any time. If you don’t see yourself using your recently opened credit card anytime soon, don’t keep it in your wallet. Instead, keep it in a safe place. If you lose your wallet, you will have one less card to worry about.
If you have a safe at home, put your credit card there. Otherwise, find a secure location that you’ll remember to check in case the need to use that credit card arises.
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