While credit cards are a great convenience, is it possible to have too many of them? A common financial myth holds that having too much credit card debt will negatively impact your credit score. But just exactly, how many credit cards are “too many”?.
The answer is not as simple as a yes or no While unused lines of credit don’t directly harm your credit score, they can indirectly impact it in several ways. Let’s dive into the details to understand the nuances.
How Unused Lines of Credit Can Affect Your Credit Score:
1. Credit Utilization:
Credit utilization refers to the percentage of your available credit that you’re currently using It’s a crucial factor in your credit score, accounting for 30% of your FICO® Score. Unused lines of credit contribute to your total available credit, which is great However, if you have other active credit accounts with balances, adding unused lines can increase your overall credit utilization, potentially hurting your score.
2. Length of Credit History:
An additional important factor that affects your FICO%C2%AE%20Score is the duration of your credit history. Your credit score may suffer if you close an unused credit line, particularly an older one, as this can shorten your credit history.
3. Credit Mix:
The range of credit accounts you possess, including credit cards, installment loans, and credit lines, is referred to as your credit mix. Maintaining a varied credit mix demonstrates responsible credit management and adds 10% of your FICO%C2%AE%20Score. Your credit mix may be lowered by closing an unused line of credit, which could have an impact on your score.
4. Inquiries:
When you apply for a new line of credit, the lender typically makes a hard inquiry on your credit report. Hard inquiries can temporarily lower your credit score, especially if you have multiple inquiries within a short period. However, this impact is usually minor and temporary.
5. Account Closures:
Any credit account closure—even one that is idle—can have a detrimental effect on your credit score. This is due to the fact that closed accounts extend the length of your credit history and can stay on your credit report for up to ten years. Your credit history may be shortened by closing an unused credit line, which could result in a decrease in your score.
The Bottom Line:
While unused lines of credit don’t directly harm your credit score, they can indirectly impact it in several ways. If you’re considering closing an unused line of credit, weigh the potential benefits against the possible drawbacks. If you decide to keep it open, ensure you manage your other credit accounts responsibly to maintain a healthy credit utilization ratio.
Additional Considerations:
- Credit card rewards: If your unused line of credit offers valuable rewards, keeping it open might be worthwhile, even if you don’t use it frequently.
- Annual fees: Some lines of credit have annual fees. If you’re not using the line, it might be more cost-effective to close it and avoid the fees.
- Temptation: If you’re worried about the temptation to use the line of credit and potentially overspend, closing it might be the best option.
Remember, managing your credit responsibly is crucial for maintaining a good credit score. Carefully consider the potential impacts before making any decisions about your unused lines of credit.
How Credit Cards Affect Your Credit Score
Your credit score is calculated based on a number of factors:
- Payment history. This is the most significant factor, making up 33.5 percent of your credit score. Your credit card payments are crucial, even though it accounts for all of your monthly debt payments. When payments are made after the due date, credit card companies are the least understanding and promptly report the incident to credit bureaus.
- Debt-to-credit ratio. This ratio, also known as credit utilization, expresses how much debt you have outstanding relative to the credit you have available, or, to put it another way, how close you are to reaching the credit limits on all of your cards and credit lines. Your credit utilization accounts for 2030 percent of your credit score; a ratio greater than 2030 percent will lower your score.
- Length of credit history. The longer youve had a particular credit account, the better. The average age of those with excellent credit scores is eleven years old across all of their cards. This variable contributes to 15% of your overall score.
- New credit. Your credit score may decrease by a few points whenever you open a new credit account, first when the creditor inquires about your credit report and then when the account is opened. New credit affects 10% of your score.
- Credit mix. The credit types that you possess account for the remaining 10% of your final score. Credit bureaus are interested in learning how you handle debt on various credit accounts, including credit cards, retail accounts, mortgages, auto loans, and installment loans.
When you have a short credit history, opening too many new credit cards lowers the average age of your credit accounts, which can lower your credit score. .
What Is a Good Credit Score?
A good score is typically defined as 670 or higher for credit scoring systems that use a scale of 300 to 850, such as the majority of FICO scores.
What CLOSING a Credit Card Did to My Credit Score…
FAQ
Is it bad to have an unused line of credit?
Should I close a credit line I don’t use?
Does taking out a line of credit affect your credit score?
Does it hurt your credit to close a line of credit?
What happens if I don’t use my line of credit?
If you don’t use your line of credit and the account sits dormant for a long period of time, your bank may close your account. This could cause your score to decrease because the loss of the account would shrink your available credit (and thus negatively affect your credit utilization).
Does a line of credit affect your credit score?
Like credit cards, a line of credit is considered revolving debt and treated similarly when generating your credit score—if you make your payments in full and on time, it will reflect positively in your credit score. In this article, you will learn: How do lines of credit work?
Will a personal line of credit hurt my credit score?
A personal line of credit could hurt your score if you: Make late payments. Payment history is the single biggest factor affecting your score so too many missed payments will eventually sink your score. Use too much credit. Credit utilization is the amount of credit you’re currently using out of the total credit available to you.
What happens if a credit card is unused?
Cardholders with unused credit cards often won’t pay attention to said card’s billing statements or notifications. This is usually fine when there’s no balance to pay off, but after a long period of inactivity a card issuer may close a credit card account. The exact length of time varies among issuers.