How To Make Sure That Opening Or Closing A Credit Card Isn’t A “Big Deal” For Your Credit Score

Most people who open or close a credit card see a short-term drop in their credit score, according to a recent LendingTree analysis of several thousand credit reports. The researchers compared 1,785 users who opened a single new card and 2,412 users who closed a single card.

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“I was really surprised at how much your credit score can change when you open or close a card. It was not uncommon to see scores change by 25 points or more in either direction, and it was is a big deal, ”says Matt Schulz. , Chief Credit Analyst at LendingTree.

Credit scores tend to drop temporarily after opening a new credit card account, says Ted Rossman, senior analyst at CreditCards.com. “Due to the difficult investigation that is placed on your report and also because the new account lowers the average age of your accounts.”

While these factors are beyond your control, there are steps you can take to make the drop less dramatic and avoid a long-term impact on your credit score. “Cardholders seem to have a lot more control over this movement than they realize,” says Schulz.

Here are two smart things to do when opening or closing a new credit card account, experts say.

1. Don’t accumulate a balance on your new credit card

Calculating credit scores is a complicated equation. Credit bureaus take a multitude of factors into consideration, including the length of your credit, the total number of loans (including credit cards) you currently have, the combination of credit types you have, and your current balances. , among other variables.

Keeping your balances low is essential to maintaining a good credit rating, says Schulz. LendingTree’s analysis found that two-thirds of people who opened a card increased their balances soon after. Their average scores dropped 14 points in the first month with the card. Among those who reduced their overall balance, scores increased by 11 points over the same period.

“People tend to think too much about credit,” says Schulz. “It’s really three things: paying your bills on time every time, keeping your balances as low as possible, and not asking for too much credit too often. If you do these three things over and over again, your credit will be perfect. “

Ideally, these three steps will help you achieve a good credit rating (mid 700s and up). This will help you get the best rate on a credit card, car loan, mortgage, or other loans and lines of credit.

2. Maintain use of credit when closing a card

While it’s crucial to pay in full and on time each month, it’s not enough, says Rossman. “The main disadvantage of closing a credit card is that it can drive up your credit utilization rate,” he says. “The use of credit, of course, is the credit you use divided by your credit limit. It is marked on each card individually and also on all of your combined cards. And it usually reflects statement balances, so even someone who pays in full and avoids interest can have a high credit utilization rate.

Opening a credit card can actually improve your credit utilization rate because it gives you more available credit, as long as you don’t use too much, says Rossman.

On the other hand, closing a credit card can hurt your usage rate. For example, “let’s say you have balances of $ 3,000 and a total credit limit of $ 10,000,” he says. “It’s a 30% credit utilization rate, which is pretty good. But if you cancel a credit card with a $ 5,000 limit, your $ 3,000 balances now consume 60% of your new total credit limit of $ 5,000. It can hurt your credit score. . “

There are a number of ways to avoid driving up your credit card usage rate. Instead of closing an old card, leave it open and use it occasionally, but make sure you pay it off on time and in full each month, suggests Rossman.

Or you can ask the card issuer for a product change. “This is when you ask a card issuer to pass you on to a card – maybe a card that charges an annual fee or is no longer suitable for your spending habits for various reasons – to one of its other cards, which may not charge an annual fee. or offers rewards that suit you better, ”says Rossman. “A product change can preserve your existing credit limit and will not affect your credit score.

If you have multiple cards from the same issuer, you can request that the credit limit of the card you close be reallocated to another of your cards.

In general, Schulz and Rossman suggest spreading out credit applications to limit their effect on your score. “In other words, try to avoid the five [applications] over a two-year period, ”says Rossman.

If a new car or house is on the horizon, avoid opening a new card within 3 to 6 months before seeking financing for that expensive purchase, says Schulz. “This report is further proof that you shouldn’t open or close a credit card if you plan to get a mortgage or car loan in the near future. Even small changes in your credit score can have a major impact on your interest rates for these loans. A 25 point change in your credit could be a much bigger deal. So proceed with caution. “

The article “How to make sure that opening or closing a credit card isn’t a ‘big deal’ for your credit score” originally published on Growing Up (CNBC + Acorns).


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