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Sometimes, more spending power can work to your benefit.
The holiday season is when a lot of people tend to ramp up their shopping, and understandably so. If you wanted more purchasing power during the holidays this past year, you may have made the decision to open a new credit card.
But what if you’re back to your regular spending routine now, and you 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 you credit score.
Closing a credit card could hurt you
The length of your credit history plays a role in determining your credit score. And so closing a credit card you’ve had open for a long time could result in a credit score hit.
In this situation, though, you’re not talking about closing a long-standing account. Rather, you’re talking about closing a credit card you opened very recently. And canceling an account that’s only been open for a month or so shouldn’t be a big deal from a length of credit history perspective.
But that doesn’t mean closing your credit card is the right call. That credit card could still be helping your credit score, even if you don’t realize it.
Another big factor that goes into calculating a credit score is utilization, or the amount of available credit you’re using at once. Generally speaking, a credit utilization ratio of 30% or less will do good things for your credit score. But once your utilization ratio exceeds the 30% mark, your credit score has the potential to take a hit.
So, let’s say you opened a new credit card during the holidays with a $3,000 spending limit, and prior to that, your spending limit across your older credit cards was $10,000. It may be that you’re sitting on a $3,500 credit card balance due to carrying older debts forward and adding to your total during the holidays.
If you’re looking at a credit limit of $13,000 across your various credit cards, a balance of $3,500 puts you at about 27% utilization. That’s below the threshold where you start to creep into the danger zone.
But watch what happens if you close that newly opened credit card. Suddenly, you’re looking at a credit utilization ratio of 35% due to your total limit shrinking, which is really not where you want to be.
That’s why hanging onto a credit card you don’t think you’ll use often could make sense. If you close it, you might cause yourself credit score damage for no good reason.
Find a safe place for a credit card you’ll rarely use
You may carry your credit cards around 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 somewhere secure. If you lose your wallet, you’ll have one less card to worry about.
If you have a safe at home, stick your credit card in there. Otherwise, find a secure location that you’ll remember to check in case a need to use that credit card does arise.
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