It’s the holiday season, but it’s also not too early to start thinking about a happy, healthy new year. That’s especially true when it comes to credit cards and your credit health. Whether you don’t have any cards or don’t have room in your wallet for any more, the end of the year is a great time for a credit card review. But before you do, it pays to know how credit card decisions you make may factor into your credit health.
If you’re not using too much of your available credit on any of your cards, that’s generally a good thing. However, if you’re regularly getting close to maxing out some or all of your cards, you may be hurting your credit health. That’s because when evaluating your creditworthiness, lenders typically view borrowers who regularly use up a lot of their available credit as a higher risk of default. That’s true even if you always pay off your (high) balances in full every month.
You should also know that missing even one credit card payment may have a dramatic effect on your credit health. Generally, on-time payment is a critical factor creditors look for when they’re considering lending you money.
When you apply for a credit card, the issuer usually makes what’s known as a hard inquiry on your behalf. In this case, a hard inquiry means you’re giving permission to the credit card issuer to request your credit report from one or more credit reporting agencies to help evaluate whether or not to issue you the line of credit you’re applying for. Whether or not you end up qualifying for the card, this hard inquiry would be reported to one or more of the credit reporting agencies and listed on your file.
Typically, credit scores factor in hard inquiries as a small negative. That’s because creditors generally don’t like to see too many hard inquiries on your report. Why? Because when someone’s applying for a lot of credit, especially within a short amount of time, it’s a signal they may be more likely to default on their existing credit.
Opening a new account can also help boost your credit health in a few different ways. For one, another lender will have decided to extend you credit. That’s a positive in future creditors’ books (assuming, of course, that you can handle this new line of credit). Your new line of credit will also show that you have more available credit than before, which can also be perceived as a positive.
At first glance, you may think closing an account has a positive effect on your credit health. Especially if you’re struggling to balance many credit card accounts, it can seem as though creditors would encourage slimming down. And there’s some truth to this – if you need to close an account or two to get ahold of your credit situation to make on-time payments, reduce maxed-out balances, and the like, that would likely help your credit health.
But, remember that closing an account means you’re managing one fewer than before. It also means that whichever allowable credit you had on that card will go away. This is why, usually, closing an account will have at least a short-term negative effect on your credit health.
If all this sounds complicated, it doesn’t need to be. In the end, be honest with yourself about your credit card usage. If you’re struggling to make on-time payments or find you’re maxing out your cards, whichever perks or rewards you get from a card may not be worth the struggle and potential damage to your credit health. If, on the other hand, you’re getting good benefits out of your credit cards, handling on-time payments, keeping your debt in check, and not using too much of your available credit on each card, you might decide to add another card to your wallet. Take the time to review your credit cards now, so you’re a step ahead when the new year rolls around. After all, who needs a new year’s resolution when you’re already ahead of the game?
At TransUnion, we believe in Information for Good. Whether it’s creating web-based financial products or sharing expert tips, insights and news on our blog, our mission remains the same: putting powerful tools and resources in your hands to help you know your credit, protect your identity and more effectively manage your financial picture.