Consumers have become more concerned about their credit scores these days, especially when a better score can result in lower credit interest rates and whether you can get approval at all on home loans. With this in mind, many consumers are more aware of their credit and, unfortunately in the process of trying to improve their score, sometimes are harming their credit score.
In a recent article, Jeff Mandel and Marlin Brandt, the owners of ApprovalGuard, cite good examples of how you can harm your credit rating. They said, "Take a recent client we will call "Rachel." Rachel was reviewing her credit and decided to close her eight-year-old VISA credit card with a credit line of $18,000. She didn't use the card but once or twice a month and had two other major bank cards that provided "rewards points." So to keep her credit record "clean" she decided to cancel the card. The next month she found out that this one decision cost her 87 points on her credit score, dropping it from 752 to 665."
This story happens way too often and is typical for how most people manage their credit by trial and error. Over a lifetime, many people eventually build up some decent credit; however, that same level of credit could have been achieved so much earlier in life with guidance and help.
According to them, a consumer credit score is made up of five key components:
- Payment History - 35% Types of accounts (credit card, mortgage, etc.), accounts paid as agreed, number of past due accounts, etc.
- Amounts Owed - 30% Balances of current loans, debt-to-credit ratio, proportion of installments still owed, etc.
- Length of Credit History - 15% Time since accounts opened, last activity, etc.
- New Credit - 10% Recent inquiries, new accounts, etc.
- Types of Credit Used - 10% Mortgages, credit, retail, etc.
In Rachel's case, the major bank credit card she canceled was paid on time every month for eight years. She didn't use credit a lot, and this particular credit card represented the best contribution to the amounts owed and length of credit history category. Although Rachel had two other major bank credit cards that offered rewards points, they were only months old and had only been used intermittently, giving them much less value on her credit score. Next to her mortgage loan, the eight-year-old VISA credit card was her strongest piece of credit. Consequently, the other newer cards also had higher interest rates and yearly fees than her VISA card.
Contrary to popular belief, credit scores do not penalize you for having too much available credit. With this in mind, it's better to preserve your credit score with 15 years of established credit history and old accounts in good standing than to have fewer and newer open accounts. Major bank credit cards have more impact on your credit than, say, a department store card.
Further, Mandel and Brandt say that closing a credit card can greatly affect your credit scores; however, sometimes you may have no choice. Credit cards that are unused or rarely used can have their credit line reduced or may even be closed without your approval by the credit card company. This can affect your credit score just as much as canceling the card yourself.
Jeff Mandel is president and Marlin Brandt is COO of ApprovalGUARD.
For more information, please visit www.ApprovalGUARD.com.
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