Managing Credit Finances

Before Opening a New Credit Card

Opening new credit cards (or a first one) can come with lots of benefits, such as lower APR’s, bigger credit lines, points, or ways to build your credit history.

Understand the impact new accounts can have

  • One key aspect to keep in mind is the credit utilization ratio on revolving credit (credit cards). This ratio plays a big part in credit scores – FICO says it accounts for 30% of the total score. Part of this is calculated by how much available credit is being used, since using up a large portion of your credit limit reflects a risky borrower. A good ratio if you are applying for a loan is under 7 to 10% of the aggregate balance to limit ratio on revolving credit. Opening a new card can mess with this ratio because the aggregate limit will change when a new card is opened.
  • Hard inquiries are when a third party reviews your credit, and unfortunately can damage scores. This damage depends on the credit profile and could be minimal or great. What’s important is to avoid these inquiries when applying for a mortgage or other major financing, since a difference of just a few points could mean a higher rate or denial of loan. That new credit card could end up costing hundreds of thousands in extra payments during a mortgage term if the threshold needed is not met.
  • Average age of credit also plays a factor in new credit cards. People who manage their lines of credit for longer are more responsible; so, an older average age of credit equals a higher credit score. You should know that opening a new card can lower the average age of credit and decrease score. Therefore, it is so important to keep your old card open to insure the account stays on credit and helps age the average age of credit. It’s also a good idea to speak with a credit expert if you are still unsure if a new card will cause damage.

Is having a lot of credit cards bad for your credit scores?

Having many credit cards does not hurt your credit score it can help your score if you use them wisely. Making sure all credit cards are active at least a few months a year is better for the score and will help in giving the creditor less reason to close the account on you. Inactivity of credit can reduce scores and cause a credit grantor to shut down a card. Why extend credit to someone if they never use it? Having a high aggregate limit allows consumers more leeway in making charges without maxing out the total balance to limit ratios on credit cards. The more cards you have usually equals a higher aggregate limit. Showing you can manage many credit cards well also adds points since it reflects a responsible and sophisticated consumer.

When opening a balance transfer card

A balance transfer card can offer appealing promotional APR’s of 0%. These are used to consolidate credit card debt making it more manageable to pay off the debt since interest will not collect during the offer period. Make sure the read the fine print before agreeing to one of these accounts, they usually collect a 3 to 5% fee on the transfer and will charge retroactive interest in the balance transfer is not paid off in full by the period. If you consolidate all your debt onto one card it’s important to be aware of your balance-to-limit ratio, if you’re not looking to take out a loan soon try and keep that balance below 50% and/or pay it down as soon as possible.

When closing an old account

Whether opened or closed, the age of an account on credit will be factored into the FICO score if it is on the credit profile. If old accounts are closed, they will still factor into the average age of credit as long as they remain on the report. The reason it is better to keep accounts open is that they will not fall off credit if they are open and active. The credit rules state that any inactive (closed) accounts can drop off credit after two years of inactivity. This may or may not happen. We recommend using all accounts at least twice a year to make sure the creditor does not close the account. This allows you to benefit from having the accounts on your credit indefinitely.

When paying down outstanding credit card balances

Creditors must apply payments made on credit cards (above the minimum) to the highest interest-bearing portion of the balance first. Prior to this act, payments were applied to the lowest interest portion first. This practice made the most profit for the creditors and was ruled unfair and prevented with the Credit Card Accountability & Disclosure Act of 2009.

Timing and strategy are important to keep in mind when applying for new credit. For example, if a consumer has a 750 credit score and is planning on buying real estate or refinancing a loan they should not open credit until the loan is approved. Even opening one new account could drop the 750 score low enough to affect an interest rate, costing the borrower hundreds of thousands of dollars over the life of the loan. Since the threshold for excellent credit is 740 and above, once the new account is opened and updated on the credit report scores will definitely drop over 10 points and exclude that applicant from the better interest rates. Some might even find they are rejected for a loan.Those in the market for a mortgage must use timing and goals to make decisions.


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