Why You Be Cautious when Applying for Credit Cards
You are always very enthusiastic while applying for a credit card. But after some time, you find a bunch of cards lying in your wallet, many of them are unused. Some of these credit cards charge annual fees also.
As most of them remain unused, you get a temptation to cancel them. Is it a right thing to do?
The way in which you will operate your credit card will reflect in your credit score. Also, the credit limit you enjoy on these cards will be looked favorably by any lender. If you are making regular and timely payments for the outstanding balances on these cards, it will boost your credit score further. Even if some cards remain unused, the ratio between your total available credit amount on your cards and actual spending on them remains high. For example, if you are holding a number of cards with an overall credit of $15,000 and you have used only one card for $3,000, you have utilized only 20 per cent of your total available credit. This is a good percentage as per the norms of any lender.
Now suppose you decide to cancel some unused cards with available credit facility of $9,000. In that case, your available credit limit automatically drops down to $6,000. As your utilized credit amount is $3,000, it now represents 50 per cent of your available credit. This ratio is obviously high and it will hurt your credit score. This high ratio will be interpreted by credit card companies as a risk for your future payments.
It is a good idea not to cancel your cards. Instead, you can keep them with minimal use. Even if you think of canceling some of them, you should not cancel your oldest card. The period for which you are holding your card also affects your credit score. The oldest card will give you the benefit of longer credit history. Consumers with the longer credit history are considered less risky as compared to those with relatively shorter history.
If you are planning to apply for a mortgage or a car loan soon, canceling cards will create a negative impact on your credit history. In that situation it will be advisable to continue with the unused cards until your loan process is complete.
Many people, who are not eligible to get credit card, apply for a store card (a card issued by the departmental stores). If they are regular in making payments on that card, later on they become eligible to get the normal credit card. Then they want to cancel the store cards, considering it useless. If these store cards are not charging any fees, it is always advisable to keep them. It will make a diverse mix of cards for you which will be considered good by the credit bureau.
