Managing Accounts and Credit Scores
Your credit score can not only be affected by your payment and purchasing behavior. A good deal of your score also depends on how you manage your accounts. The crucial things involved in here is how often you open or close accounts, and how you manage the balances of your different accounts.
Closing and opening accounts generally have negative effects on your credit or FICO score. Closing an account means the end of payment and purchase history, and so it would affect several factors that make up your credit score. This is especially true if you’ve had the account for a considerable amount of time.
Opening accounts usually is harmless, but when done with frequency, the negative effect comes from the frequent credit inquiry that credit card issuers make on your score. This is because FICO considers frequent requests for your score as a risk flag. This is complicated further if some of your applications were rejected. These can make you easily lose up to at least ten points from your credit score. Another disadvantage is that the lessened score can also prevent you from getting a lower APR on your new account application.
Even if you pay all your balances and dues every month, you might not be getting the best credit score possible from your actions. Generally, being a good payer results in a good score, but if you max out your balance and limit from time to time, it will also raise some flags and would result to a decrease in your credit score. The reason is that when you go near the limit with frequency, you’ll be considered as a risky borrower since one slip-up could make you fall into debt easily.
But that is not all. Having a maxxed-out card, even though you ‘re able to pay it off in time, would also mean you’d have a high debt-to-credit ratio. When this number is high, it also increases your risk factor in the eyes of credit reporting agencies. Even if it is temporary, remember that scores are gathered over time, and those instances don’t go away easily. These would still be included in calculating your credit score.
Also, carrying a balance is better than having none at all. Of course, credit agencies would like accounts where they can earn on the interest. This also ensures that there’s constant activity in your account. One way you can do this is to rotate the use of your cards so that each account would have some form of balance and activity.
Good payment history and behavior is crucial to getting a solid credit score. But how you manage your accounts also form part of the equation. So long as you know the effects of closing and opening accounts, carrying balances, and using your credit limit, you could use these information to augment your good payment behavior. By also covering these aspects of credit card account management, you’ll be getting the best credit score possible for yourself.