You are probably aware of both the advantages and potential drawbacks of using credit cards. On the one hand, proper and ongoing usage of credit cards can help you to build or improve your credit rating, an essential process if you one day hope to make large purchases like a car or a home that require a top tier credit rating for loans with the best interest rates and other terms.
On the other hand, misusing credit by spending more than you can reasonably afford to pay, carrying a heavy burden of debt, and suffering late and/or missed payments on a regular basis can lower your credit rating and make it more difficult to buy on credit or get loans in the future.
What you might not be aware of is the fact that opening and closing new credit accounts can also impact your credit score. How does adding a second (or fifth) card affect your credit rating? What will cancelling accounts do to your history? Here’s what you need to know before you start opening and closing credit accounts like it’s going out of style.
Why Open and Close Accounts?
Before we discuss the potential effects of opening and closing credit accounts, let’s talk about why you might want to do it on a regular basis. The main reason to close one card and open another is to take advantage of beneficial introductory offers. Many cards these days offer introductory terms like 0% APR for the first 6-18 months, for example. This might be paired with other desirable bonuses like rewards points for hitting a certain spending limit within the first 3-6 months.
When these benefits expire, you find yourself paying regular interest rates once again, and you’ve used the bonus points for travel, hotel stays, or other free perks, it’s only natural to want to switch to a new card that delivers the introductory benefits you crave all over again. There are, of course, arguments to be made for sticking with a single card that offers a low interest rate and incredible rewards you’ll use all the time, but there’s just no denying the draw of introductory offers. You just need to understand how this revolving door of credit cards can impact your score.
It turns out that opening new accounts is generally a good thing, for a number of reasons. Your credit rating is based on a variety of factors, including how good you are about making timely payments, the balance you carry on each card, the duration of your credit history (overall and for individual accounts), the types of credit you use, and the number of credit applications you’ve made.
If you’re able to pay on time and keep all of your balances under about 30% of the limit, there’s no reason not to have multiple cards. This is especially true since having a variety of credit types (credit cards, store cards, home and auto loans, etc.) can slightly improve your credit score.
Where you can get into trouble is if you don’t use your cards appropriately. Suppose, for example, that you have three credit cards, two of which you pay off religiously every month and one of which has a high balance, consuming, say, 75% of available credit. This is actually going to be bad for your credit, whereas carrying a balance of under 30% of the limit on each card and paying them down more slowly would improve your credit score over time.
You also want to keep at least one long-term credit account to anchor your credit history. If you’re cancelling old accounts and adding new ones all the time, it could hurt your score, although probably not significantly if you still pay on time and carry low balances.
As for credit inquiries, which occur every time you take out a loan or open a credit card, they’re not likely to have any kind of long-term impact if your credit score is already high and you take steps to limit the number of applications over a short period of time. If you’re just starting to build your credit, there may be a greater impact, but only for about 6-12 months.
As with opening new credit card accounts, closing old ones can be a mixed bag. On the one hand, you’ll want to close old accounts that you no longer use to avoid the potential for identity theft, and it pays to get rid of high-interest cards in favor of options with better terms once you’ve established top tier credit. You’ll definitely want to cancel any cards with annual fees if you’re not using them.
On the other hand, long-term accounts anchor your positive credit history and compensate for the possible hits from hard inquiries and new cards with no credit history (of payments) yet established. Plus, when you shut down old cards, you also have to make sure to pay off or transfer balances and cancel recurring charges. As long as you’re aware of the potential pros and cons, however, you can make the most of opening and closing new accounts without significant damage to your credit score.