Sometimes greater purchasing power can benefit you.
- 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 add-on card you recently opened, but that doesn’t mean closing that account is your best option.
The holiday season is when many people tend to increase their purchases, and this is understandably the case. If you wanted to have more spending power during the holidays last year, you may have made the decision to open a new credit card.
But what if you’re back in your regular spending routine now and don’t see yourself using that credit card for the foreseeable future? You may be inclined to close that account. But doing so could have a negative effect 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. Therefore, closing a credit card that you have had open for a long time could result in an impact on your credit score.
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However, in this situation, you are not talking about closing a long-standing account. Rather, he is talking about closing a credit card that he opened very recently. And canceling an account that’s only been open for about a month shouldn’t be much of a problem from a credit history perspective.
But that doesn’t mean closing your credit card is the right move. That credit card could still be helping your credit score, even if you don’t realize it.
Another important factor that goes into calculating a credit score is utilization, or how much available credit you’re using at one time. Generally speaking, a credit utilization ratio of 30% or less will positively contribute to your credit score. But once your utilization rate passes the 30% mark, your credit score has the potential to take a hit.
So, let’s say you opened a new credit card over the holidays with a spending limit of $3,000, and before that, your spending limit on your old credit cards was $10,000. You may have a credit card balance of $3,500 from having carried over past debts and added to your total over the holidays.
If you’re looking at a credit limit of $13,000 on your various credit cards, a balance of $3,500 puts you at about 27% utilization. That’s below the threshold where you start to crawl towards the danger zone.
But watch what happens if you close that newly opened credit card. Suddenly, you see a 35% credit utilization ratio due to your total limit being lowered, which isn’t really what you want.
That’s why sticking with a credit card you don’t think you’ll use often might make sense. If you close it, you could hurt your credit score for no good reason.
Find a safe place for a credit card you’ll rarely use
You can carry your credit cards with you in your wallet so they’re available to swipe at any time. If you don’t see yourself using your recently opened credit card anytime soon, don’t keep it in your wallet. Rather, keep it in a safe place. If you lose your wallet, you’ll have one less card to worry about.
If you have a safe at home, put your credit card in there. If not, find a secure location that you’ll remember to check in case the need to use that credit card arises.
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