4 burning questions about credit scores |
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"If a person is responsible and they've got five credit cards in their wallet and they, for some reason or another, charge on
all five and pay them off every month, I have no problem with that," says Gail Cunningham, senior director of public relations at the National
Foundation for Credit Counseling. "But that's going to be the exception rather than the rule."
Spenders who need to limit their ability to run up balances might fare better with fewer cards, says Bill Hardekopf, CEO of
LowCards.com and coauthor of "The Credit Card Guidebook: Understanding the Complex
World of Credit Cards."
If you're considering a new card, try to steer clear of store cards, which tend to have high interest rates and low credit limits.
2. Should you close credit card accounts?
The short answer: No, unless you have a solid financial reason to do so.
The long answer: "I would say that the biggest impact closing a credit account can have is
essentially reducing the amount of available credit the consumer has, which in turn can increase their utilization figure, which can have
a negative impact on the score," says Fair Isaac's Dornhelm.
If you're going to ditch a card, improving your credit scores shouldn't be the motivation.
"A card with an annual fee that you never use is a good candidate for closure," says Davidson. Consumers could try getting
the fee waived by calling and threatening to close the card, she suggests.
Having multiple cards could help in such a situation. If the issuer won't work with you and you can't pay off the balance on
that card, then you can do a balance transfer to an existing card in your wallet without applying for a new card.
Davidson advises consumers not to close the oldest account or dump the card with the highest limit. Reducing the average age
of your credit card accounts or losing a high credit limit can hurt your credit scores significantly, especially if you only have a few cards.
The impact on your average account age won't be immediate. As long as the closed account is on your credit reports, it's
going to be considered by credit scoring models. Closed accounts can remain on credit reports for up to 10 years.
Unless a card is costing you money or presents a spending temptation, keep it open to help your credit scores. Use it once
every six months -- purchase something small and pay it off to keep it active.
Learn more about canceling cards by reading the Bankrate feature,
"Closing credit card dings credit score."
3. What's the ideal credit card utilization?
The short answer: There's no actual threshold, but the lower your utilization, the better.
The long answer: One of the most confusing pieces of advice on improving your credit scores is
what utilization ratio you should try to keep your balances below. Recommendations of 30 percent and 50 percent abound, but other experts
recommend 10 percent, 35 percent and 40 percent.
"There is some misconception out there that there's a hard and fast threshold above which the consumer will start hurting
their score, below which it's helping the consumer's FICO score," says Dornhelm. "Instead, it's a matter of gradations where the lower the
utilization, the higher your score."
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