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Do This to Create Higher Credit Scores


Q:

My wife and I got credit cards with USAA in the mid-1970s when I joined the Air Force. We have kept the same credit line to the present day, although we opened up another credit line with USAA a couple of years ago that was a cash-back card. We no longer use the original card because it doesn't give cash-back. Can we close it out, or do we need to keep it open for the credit history?

A:

So you paid off a credit card, or you are going to start using a different card because of better card benefits – what do you do with that old credit card? Do you leave it open or close it?

As a rule of thumb, you always keep the card open!

One of the formulas that affect your credit score is the Credit Utilization Ratio (CUR). The CUR evaluates the percentage of your overall credit limits. The lower the percentage, the better your score will be. The rule of thumb is to stay below 30%.

Let me give you an example:

Let us say that Bill has $50,000 in credit limits spread over five credit cards. Of those five credit cards, he has a total credit balance or debt of $10,000. That is a CUR of 20% which is below 30% (20% of $50,000 is $10,000). This position is a positive effect on his credit. In another scenario, his balance went from $10,000 to $25,000 of the combined credit limits of $50,000. That would be a CUR of 50%. Now, which negatively affects his credit score.

By closing a credit score, you lose valuable credit history and probably increase your CUR.

Let’s say Bill closes one of the $10,000 credit limit credit cards and now has $40,000 instead of $50,000 in combined credit lines and still has $25,000 in debt on the remaining four cards. His CUR would increase from 50% to 62.5%! ($25,000 is 62.5% of $40,000).

It might make sense to close it in certain situations because everyone’s credit scoring is different and unique. It is simply better to be on the safe side.

One tip – If you are going to stop using a credit card and throw it in a drawer, make sure you go online and sign up for text and email alerts. Due to ID theft's high probability, you want to be alerted to any transactions that you didn’t authorize. They can go unnoticed, and you could have a debt in collections before you know it.


Bob Brooks

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