Optimizing Your Credit Score: Keeping Cards Open and Managing Utilization
When it comes to managing your credit score, having a few credit cards with no balance is generally better than closing them. This article explores the reasons behind this, including the impact on credit utilization ratio, length of credit history, and credit mix, along with actionable recommendations.
Understanding Credit Utilization Ratio
Your credit utilization ratio is the amount of credit you’re using compared to your total available credit. Keeping cards open even with a zero balance increases your total credit limit, which can lower your utilization ratio. A lower ratio is typically better for your credit score. For example, if you have a 300 limit and a 250 balance, your utilization will be higher compared to a zero balance scenario. The best long-term strategy is to request regular increases in your credit limits, aiming for limits of at least ten times your typical spending. This keeps your utilization at 10% or less, a point at which you start losing FICO points.
Importance of Credit History and Mix
Another critical aspect of credit management is the length of credit history. Closing old accounts can shorten your credit history, especially if they have been open for a long time. A longer credit history can positively impact your score. Additionally, having a variety of credit types, such as credit cards, loans, and mortgages, can also benefit your credit score. Keeping multiple credit cards contributes to this mix.
Impact of Closing Accounts
Closing a credit card can sometimes lead to a temporary dip in your credit score, particularly if it affects your credit utilization or length of credit history. For instance, if you have only one or two accounts, your credit score will be more susceptible to influences like inquiries, a phenomenon known as “thin credit.” It’s best to have at least three active trade lines, such as credit cards and loans, appearing on your credit report.
Strategic Use of Credit Cards
Strategic use of credit cards can significantly impact your FICO score. Thirty percent of your FICO score is derived from your credit utilization, which is the percentage of your credit limit reported as outstanding. It refers only to revolving accounts, such as credit cards. A single credit card reported near its limit can cost 50–75 points, even if your balance and limit are low. If you have a 250 balance reported on a card with a 300 limit, you’ll lose 50 points or more even if you pay the balance in full. The reported balance determines your utilization.
Optimizing Your FICO Score
The best long-term strategy to minimize utilization is to request regular increases in your credit limits. Aim for limits of at least ten times your typical spending, keeping your utilization at 10% or less. Yes, you read that correctly: if your balance is reported more than 10% of your limit, you’ll lose some points. Additionally, you can optimize your scores by paying about a week before getting the statement, as card issuers report balances to the bureaus when they send out statements.
Strategies for Maintaining Open Accounts
It’s best to keep cards open if there are no annual fees. Consider making small purchases on your cards and paying them off promptly to keep them active without accumulating debt. Regularly check your credit report to understand how your actions affect your score.
Considerations for Closing Accounts
While it’s generally better to keep your cards open, some people may want to close them. If you decide to close an account, remember that FICO keeps considering closed accounts in the average age of accounts for up to ten years. However, your best strategy is to keep the accounts you have. Use them regularly instead of cash and request regular credit limit increases. Regular use will enhance your odds of getting the increase. Paying the balance in full each month will avoid interest charges.
Additional Tips for Credit Management
There are some little-known quirks in the FICO algorithms. FICO docks you 12–20 points if the balance reported on all your credit cards is zero. You can avoid this by ensuring that at least one card reports a balance of 5-10, without carrying a balance and paying interest. The statement balance is the one that determines your utilization.
I have 14 active credit cards, using two of them regularly for specialized purchases such as Costco, gas cards, and other retailers. If any of your cards have an annual fee, ask the issuer to waive it. They often do, or you can offset the fee with the benefits they offer. For instance, my Amex card charges me a “membership” fee each year but I can easily offset it by using the card at certain restaurants I’d go to anyway.
In conclusion, keeping cards open and wisely utilizing them can significantly impact your credit score. Regularly check your credit report, maintain your credit utilization, and use your cards strategically to maximize your score.