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The following is a guest post from Ed O’Brien. His blog, Credit Repair, offers free advice on preparing yourself for a financially responsible future.
When you start your mission to begin repairing your credit, your first step is to get a clear understanding of how much debt you have and make a plan to eliminate a bulk of that debt in the shortest period of time.
Repairing your credit requires that you meet your financial obligations as they are stated in the contract or agreement between you and your creditor. Once you are able to get back on track by making regular, on-time payments and satisfying your debts, you will begin to see your credit score improve.
One potentially bad move during the debt relief process for many consumers who are able to eliminate their credit card debts is the inclination to start canceling all of their paid-off credit card accounts in an effort to reduce temptations of repeating history. However, as part of the credit repair process, canceling credit cards may be the worst move you can make.
Your credit history is a factor of your three digit credit score. Part of that history involves the timeline from when you first established a credit profile. If one or more of the credit cards you have paid off and wish to close are the first accounts you started to establish credit, closing them can change your whole credit foundation.
For instance, say you opened your first credit card in 1991, and this was in essence the first line of credit you were issued. Fast-forward to 2011 and you have just zeroed out the account balance on that same credit card. According to your credit profile, this card has been a large part of your credit profile for 20 years. Closing the account would then cut short your credit history and part of a credit score calculates how long you have had credit.
Credit card temptation can be a tricky situation but ultimately it is up to the consumer to enact a plan that will really keep them on track. By establishing a solid budget and tracking how money is spent, the urge to spend on credit just because it is there can be stopped in its tracks. Just because credit cards are there does not mean you need to use them.
However, keeping open and active credit card accounts is a vital part of maintaining a good credit history and a high score. It is recommended that you occasionally use all of your credit cards somewhat regularly for small purchases during the month and then pay off the full amount due before the end of the billing cycle. Not only will this keep credit card accounts open (creditors do have the right to close accounts they deem inactive), it will also help rebuild your credit score since your payment history has been turned around and balances aren’t being carried over.
If you feel you have entirely too many credit cards and do wish to close a few of the accounts, be absolutely certain you are only closing those accounts you have only recently opened so as not to jeopardize your credit history. It is also imperative that no credit card account be closed when a balance still remains. Doing so can trigger an increase in interest rates, making it more costly to pay off the debts each month.
Try designating credit cards to particular buying habits, such as one for gasoline purchases, one for groceries, and one for online purchases. Not only will you be able to itemize your spending on a monthly basis effortlessly, you can also maximize all of the incentives and rewards you earn from your credit cards.
Credit cards can certainly be the root of a bad credit score to begin with but they are also instrumental in getting back on track with your personal finances. When utilized in the right manner, credit cards can be the chief resource for repairing your credit history and boosting a low credit score in a relatively short period of time.
How about you all? Have you ever canceled/closed credit card accounts? How did it affect your credit score? What techniques do you use to make sure to not spend excessively?
Share your experiences by commenting below!
Jacob’s Thoughts – Listed below are my random thoughts as I was reading this article.
- Personally, I have many credit cards (~8) because I like to take advantage of the little free money promotional offers they throw at me. I always make sure that the cards are “no annual fee” credit cards, of course.
- After I receive the money from the promotion, I am very cognizant NOT to cancel the account due to this very concept discussed in this article.
- Instead, I set up an automatic payment each month from the credit card so that it keeps a running credit history. I make sure to always pay off the balance in full each month.
- Examples of small payments that could be set up with non-principal credit cards would include Netflix monthly subscriptions, cable internet payments, journal subscriptions, etc…
- For the bulk of my spending, however, I use my favorite cash-back credit card, The Chase Freedom, which gives 3% cash back in rotation categories throughout the year! Very nice!