Category: Building Credit

Does Closing A Credit Card Hurt Your Credit?

Updated 10/25/17

People are always asking me: Does closing a credit card hurt your credit?

Closing a credit card does not hurt your credit directly. But closing a credit card may hurt your credit indirectly.

Confused? Let’s explain…

 

What is credit?

First let’s go back a step and explain how a Fico score is calculated.

A fico is score is calculated by the following:

  • 35% Timely payments – paying all of your bills on time
  • 30% Credit utilization – how much of your credit limit you spend (less then %15 preferred)
  • 15% Credit history- for how long you have credit
  • 10% Credit mix- the type of accounts you own
  • 10% New credit- how many credit pulls or new accounts you have

(For more on this, see: The 5 Most Important Factors In A FICO Score.)

 

Credit Utilization

After understanding how a Fico score is calculated, you’ll realize that by closing a credit card you may be hurting your credit utilization (even if the fact that you closed a credit card is not a red flag on its own). For example, let’s say you have four credit cards, each having a $5,000 credit limit (totaling to $20,000.) You spend a total of $10,000 on your credit cards. Your credit utilization would be at 50% ($20,000 limit with $10,000 spent.) Now, by closing one credit card, your utilization would become 75% even without spending an additional dime ($15,000 limit with $10,000 spent.)

TIP: If you have a second card with the same bank, they may allow you to transfer the credit line to the other card, so this will save you from this headache.

 

Credit History

If you’re closing your oldest credit card, then this may affect your credit history. How? You will be losing your oldest trade line.

For this reason, I always recommend that the first two or three credit cards that you open should be credit cards with no annual fees. As a result, you would be able to keep them open for as long as you live.

 

Credit Mix

It is beneficial to have five open trade lines with a mix of revolving loans (credit cards etc.) and installment loans (car loans, mortgages etc.) By closing a credit card, you will be losing one of your trade lines. This can hurt your credit.

 

Conclusion

If you want to close a credit card, make sure to transfer the limit to another open credit card. Also, ensure that it is not one of your first three credit cards. Be careful to have five open trade lines at all times. If all of the above conditions are met, then closing a credit card won’t hurt your credit enough to make you poor.

If you’re closing a credit card it is a great time to rethink the reason you opened the card in the first place. (Maybe it wasn’t the best credit card for you.) Need help choosing the right credit card? Hop over to our credit card page found here and let us help you choose the perfect credit card!

See you next week!

Getting Approved For A First Credit Card

Updated: 10/03/17

 

Credit is not something you are automatically born with. It is something you need to learn how to build on your own. The best way to build your credit is by getting approved for credit cards. But, hey! How do you get approved for credit cards without credit? Stay tuned for a couple of tricks on how to get approved for a first credit card.

 

  1. Authorized User (Piggy Backing)

 

The most common way, and by far the best way, of getting approved for a first credit card is by being added as an authorized user to your parent’s, spouse’s, or friend’s credit card. This is called piggybacking.

It works as follows:

Once you’re added as an AU (authorized user) on someone else’s account, the credit card company will report the credit card on your report to the 3 credit bureau with all the credit history. So let’s say you’re added as an AU to a credit card account that was opened 10 years ago, suddenly your credit report will show that you have already built credit for 10 years! Now this may sound funny, but it’s just a fact!

Not every bank will report an AU to the credit bureau, and not all report the complete history (back dates).

Check out this list:

BANK REPORTS BACK DATES
Amex yes no
Barclay yes yes
Bank of America yes yes
Chase sometimes yes
Citi yes yes
Capital One yes yes
Discover yes yes
HSBC no no
US Bank yes yes

 

Get yourself added as an AU to one or two credit cards that are open for at least two years and have a perfect payment history. The AU will show on your report after about 30 days (you can check on Credit Karma and see when it shows already). And then you will be able to get approved for a low end credit card try a Discover It or a Capital One Journey  as my past experience was that they are more likely to approve you.

Keep in mind that the same way the good credit history gets reported, so does the bad. Therefore, do not add yourself as an AU to any card that has any delinquent payments or high balances. It will do you more harm than good.

 

2. Secure Credit Card

 

Give me your money, and when you need it, I will lend it to you. This is what some banks do. They offer you an option of a secure credit card, for which they ask a deposit of about $500. They then approve you for a credit card for the same $500. So, basically they are lending you your own money.

People don’t like this option, because first of all, you need to lock up the deposit. Second, because a lot of people don’t even get approved for a secured card either (if you have a banking relationship with that bank then you up your chances of getting approved).

So even if the AU way is probably better and easier, the secure credit card option is also a solid way for getting started on building credit

Check out these good secure credit cards

 

  1. Banking Relationship

 

Banks like their clients (especially the good ones) and they want their clients to like them back. So if you have a good banking relationship with a specific bank they may approve you for a credit card, because as a client they want to give you a fair chance to prove yourself positive.

What is considered a good banking relationship?  We are talking of $10,000 plus in your account, but at times even $1500 will do the trick.

It is worthwhile to give your bank a try. Even if you get declined, you’d want to call up and ask if you can be reconsidered. Tell the representative that you have a good banking relationship with the bank so if they can please recognize that by giving you a chance of proving yourself to be a good customer (In the past if the first representative did not want to approve me, I called again and again until I found a representative that was ready to approve me).

Bank Of America, Chase, and Wells Fargo are known to take into consideration a client’s banking relationship and help their chance of getting approved for their credit cards.

My experience was best with Chase Freedom. So, if you have a chase account definitely give it a try. Again, if you get declined, try calling Chase Lending Services at 1-800-453-9719 to see if you can be reconsidered.

 

  1. Joint Account

As of this writing ONLY  Us Bank and Bank Of America offer the option of getting a joint credit card account, which is basically having someone with good credit cosign your credit card. This option is probably best only if all the options above failed (I don’t think this will happen. But, hey! You just never know).

Good luck on getting approved for a first credit card; Keep coming back to The Help Me Build Credit Blog  to read and learn how to build and maintain great credit!

You may also want to see:  5 Easy Credit Cards To Get Approved For

If you have any comments, I would love to hear from you. Please enter them below.

Please note: Although, I put a lot of effort to give my readers unbiased information. I’m legally required to notify you that I may be receiving compensation from credit card companies mentioned in this post. Please see our Advertisement Disclosure for more details.

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