When Cutting Up Your Credit Card Hurts Your Credit Score

WalletYou’re credit score is one of the most important aspects of your financial well-being. Though there are ways other than credit cards to build, repair or maintain your credit score, nothing is as easy as swiping your credit card.

A Closer Look at Credit Score

Your credit score is a mathematical calculation used by lenders to assess your creditworthiness or potential to default on a loan. This information may be used by lenders, insurance companies, cell phone providers and alike to determine if you qualify for their product, how much you qualify for or determine a qualifying interest rate.

The easiest way to start building your credit is to open a credit card and start using it. Start charging and paying it off. Proving that you know how to manage credit responsibly and that your worthy of having credit. Your first credit card will likely be a very high interest rate, given your lack of history, but with appropriate usage you will likely qualify for a lower rate in no time at all.

Don’t Cut Up Your Cards

There are many reasons why people may choose to not use a credit card. Some people find themselves in debt and cut their cards up to resist temptations. Some people may feel having a credit card will lead to temptations. Some people pay off their cards, find they’re not using them, and close the accounts for no reason at all. Whatever the reasoning, everyone should have at least one active credit card in order to help maintain your credit score.

Your credit score is composed of reports from a credit bureaus about your credit card usage, cell phone payment history, loans and rental history if your landlord reported. When lenders, or even your landlord, check your credit score and see that you had credit cards but no longer have active accounts, it doesn’t give a very good depiction of your current financial situation. It doesn’t matter if you make six figures a year, pay your utilities on time every month in full and have a nice smile, if you don’t have a credit score that reflects all this lenders won’t care.

But I Have No Control!

If you’re the type who simply can’t control your spending on a credit card so you’ve chosen to not use one, or closed your accounts, it is still important that you maintain an active account in good standing for the sake of your credit score.

Make it simple but charging utilities that you are required to pay anyway. Have them set up to automatically charge and pay your credit card just as you would a normal utility bill. You do not necessarily have to ‘shop’ to maintain a credit card in good standing.

If you currently have a credit card with a balance, large or small, work on paying it down. Carrying large balances will affect your credit score negatively but paying them down will help. If you’re carrying multiple accounts, you may want to close some once they’re paid off. In terms of your credit score ”the more the better” doesn’t apply, though the age of the credit report does count. If you still have your first credit card in good standing keep it. It shows that you’ve been loyal with a lender and maintained you’re end of the agreement in terms of payment arrangements.

The moral of the story is that though credit cards have the potential to cause financial havoc on your life if used improperly or irresponsibly, the power they hold over your credit score can’t be denied.There are many options for how you can maintain a credit-card-free life without cutting your cards up.

[Featured image credit http://dribbble.com/Artua]

How has your credit score been effected by your credit card usage? 

You can also check out this great credit score tool online:

About Catherine MacLean

Comments

  1. Catherine, another great article! I wish I had read this in my late teens. One other thing I learned is that credit history looks at your oldest accounts. A few years ago I almost canceled my oldest credit card because I didn’t use it anymore and the perks weren’t as good as my new ones. Thankfully a friend new that that was a bad idea. So I still have it even though I never use it.

  2. Thanks John! I also didn’t know about the oldest account thing until a few years ago either, too late for me since I had closed my accounts. Live and learn I guess.

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