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Will Opening or Closing a Credit Card Hurt Your Credit? 6 Tips to Do It Right
You can snag some pretty awesome rewards by taking advantage of credit card signup bonuses. But are the gift cards and travel points really worth it if all that activity on your credit report winds up hurting your credit score?
It doesn’t have to, if you do it wisely. Here’s what you need to know to open and close credit cards without negatively impacting your credit score.
1. How Credit Reporting Agencies Calculate Your Score
To know what affects your credit score and what doesn’t, you need to consider what makes it up. Below are the factors that determine your score and their weight in the scoring process:
- Payment history – Regular on-time payments will boost your score; missed or late payments will lower it. Payment history has the most impact on your score at 35%.
- Debt-to-credit ratio – Also known as your “credit utilization ratio,” this represents how much of your available credit you’ve used. Using up all or most of your available credit will lower your score, while only using a small percentage will raise it. This makes up 30% of your credit score.
- Length of credit history – You also get points for how long your credit accounts have been open and how long since their last activity. The older your accounts, the more responsible you look to potential lenders. This makes up 15% of your credit score.
- Credit inquiries – When you apply for a new card, this counts as a hard credit inquiry or pull. Too many hard pulls in over a period of time can lower your score as it signals you’re trying to obtain too much credit too fast. Soft pulls happen when you (or an employer or landlord) check your credit history. These don’t affect your score because you’re not asking for new credit. The number of recent credit inquiries you’ve had accounts for 15% of your credit score.
- Credit mix – Having a mix of revolving credit (credit cards), retail credit (store-specific cards) and and installment loans (auto loan, mortgage, etc.) works in your favor, as it shows you can be responsible with different types of credit. A good mix is nice, but because it accounts for only 10% of your score, it’s entirely possible to have a good score without it.
Armed with this info, you can better understand whether opening a new card will help or hurt your score. A new card will often have a positive impact on your score because the increased available credit reduces your debt-to-credit ratio, which has the second-largest impact on your score. Just be sure to keep the following guidelines in mind.
2. Pay on Time
Payments made within 30 days of the due date, while technically late, won’t ding your credit score. Once you reach the 30-day-overdue mark, though, the creditor may report the late payment to the credit agencies, which can lower your score. And if you reach the 60- or 90-day-overdue marks, the negative reports will hit your score even harder. The later you are, the more damage it does to your score.
Remember, payment history makes up the largest chunk of your score at 35%. So whatever new cards you open, be sure to stay on top of them when the monthly payments are due.
3. Pay Them Off Each Month (With One Exception)
Paying your balance in full each month keeps your debt-to-credit ratio low, which is good for your credit score. It also keeps you from incurring additional fees that can eat away at any monetary gains of a new card promotion.
That said, you’ll want to make sure you keep making regular small purchases on each card to avoid getting penalized for inactivity. Having a zero balance on all of your cards for an extended period of time can actually bring your score down a few points, as it signals a failure to use your available credit wisely. Charging a small item each month and paying it off the next month shows lenders you can handle your credit and builds a positive track record. As a rule, it’s best to keep your debt-to-credit ratio between 1 and 20% at all times.
4. Keep Your Oldest Account Open
Closing an old account won’t boost your credit score, but it could lower it if it affects the overall length of your credit history or increases your debt-to-credit ratio.
If you have a number of cards and closing one will only affect these two factors by a small percentage, it’s probably safe to close it. That said, there’s generally no good reason to close an old account. Having 10 accounts you’ve paid in full each month for years shows you’re quite good at managing your credit.
5. Become an Authorized User
One trick to maintain a long credit history while opening and closing cards is to have someone list you as an authorized user on their account. Once you’re an authorized user, the account will show on your credit history and impact your score. This keeps your average account age nice and long, even as you open newer, younger accounts.
6. Don’t Open Too Many Cards at Once
In general, each hard pull takes your credit score down 3-5 points. Each inquiry stays on your credit report for two years, though it only affects your credit score for one year. If your score is otherwise high, and a rewards card truly seems worth it to you, it’s your call whether you’re willing to take the short-term points hit.
Keep in mind, opening too many cards at once can be a red flag to creditors, as it looks like you’re scrambling to get your hands on cash. Everything should be all right if you don’t go overboard in any 6- to 12-month period.
Kelly Gurnett is a freelance blogger, writer and editor who runs the blog Cordelia Calls It Quits, where she documents her attempts to rid her life of the things that don’t matter and focus more on the things that do. Follow her on Twitter @CordeliaCallsIt.