There are a lot of myths racing around online about how your credit cards impact your credit score. It can be confusing because the way credit scores are computed doesn’t always match with actual credit-worthy behavior. So you might think that canceling all but one of your credit cards is a smart financial move for you, but it would actually hurt your credit score a lot. So here’s the skinny on how to properly use your cards to help, not harm, your credit score.
Pay on Time
Your payment history is 35% of your credit score. That’s the largest impact any single factor is going to have on your score. Set up alerts or auto payments. Do whatever you have to do to make those payments on time, every time. It’s not the late fee that’s going to hurt you the most.
Pay It Off
The next biggest factor contributing to your score is your credit utilization ratio. That’s how much you owe versus how much credit you have. The lower the ratio, the better your score. Paying down your debts will definitely lower the ratio. This is also something to watch out for when you apply for a loan. To get a good interest rate, you want the highest credit score possible, and that means lowering your debt and no splurges on credit (even if you have the cash to pay it off). (See also: This One Ratio Is the Key to a Good Credit Score)
Ask for Credit Limit Increases
If paying down your debt isn’t possible immediately, you can lower your credit utilization ratio another way: Get more credit. Call your credit cards and ask for a credit limit increase. If you’ve been a good customer (which basically means you’ve been paying on time), you can probably get an increase immediately. (You can also apply for a new credit card but that temporarily lowers your score due to it being a new account.) However, if you raise your credit limit and then raise your debt by the same amount or more, you’re dinging your score. Keep your eye on the ball.
Keep Your Accounts Open
When you close a credit card account, it lowers the amount of credit you have, so it raises your credit utilization ratio, which then dings your credit. If you really must cancel some cards, choose cards with a lower available credit. If you have several cards with the same bank issuer, you may be able to transfer the available credit from the card you want to cancel to the card you want to keep. That way, you are able to close an account without impacting your ratio as much. (See also: Surprising Ways to Hurt Your Credit)
Keep Your Oldest Accounts
How long you’ve had credit makes up 15% of your score. If you applied for a credit card when you were in college, whether you use it or not, keep that account open. You can sign up for better credit cards that offer rewards and use those, but don’t cancel your oldest one.
Follow these basic tenets to help keep your score as high as possible. I always recommend checking your credit history once per year to make sure that all of the information is accurate. You can do this free of charge with each of the credit bureaus and it won’t affect your credit score.