On a mission to clean up and improve my credit score, I had taken on a couple of cards a few years ago with annual fees. Neither card had a very high credit limit, but at the time it was all any credit card company was willing to lend me. So, I signed on the dotted line and decided to swallow their fees with the hopes of building a solid payment history. Flash forward to today and I’ve finally accomplished that goal: my credit score is over 700 and I’m now receiving credit card offers from more legitimate credit card companies with lower APR’s and NO annual fee.
It took me a while to decide whether I should accept any of these new offers, though. My reasoning was that taking on a NEW card, and potentially canceling an OLD card could ding my credit score. Since raising my credit score was part of my 3-step plan toward becoming a homeowner, it seemed counter-productive to take this action. On the other hand, because I’ve put off purchasing a house for a couple of years, I decided that I really didn’t want to continue paying annual fees on cards with such low credit limits.
A NOTE ABOUT CLOSING CREDIT CARDS: It’s important that when YOU close a card of your own, you follow up with a letter to all three credit bureaus explaining to them that you were the one that closed the account, not that the account was closed by the creditor.
I’m excited to say that the other day, I accepted an offer from American Express for a card with a 10.49% APR, no annual fee, and a credit limit that is much higher than a couple of my combined cards. I canceled one of my annual fee cards, the one with the lowest credit limit, and am waiting to see how this activity will affect my credit score. I made sure to mail in my letter to all three bureaus explaining that I closed the account. If not much harm has been done, my goal is to cancel my second card with an annual fee, leaving me a total of 3 credit cards (one which I share with my husband) with only one annual fee card. I’m not really willing to relinquish the last annual fee card because I feel I need the payment history which dates back about 5 years.
Since I don’t use my cards unless I can pay them off in full each month, I should be able to quickly reestablish any points I do lose on this transaction. Just a quick refresher on how credit scores are calculated:
- 35% is based on payment history: Most reports show a two-year period of payment history on installment, revolving, and store credit. Even one payment that is over 30 days late can negatively affect your score.
- 30% is based on how much debt you owe: This is also affected by how much credit you are utilizing. They like to see a debt to credit utilization of 30% or less. Another note on credit utilization is that you should never be utilizing more than 30% of your credit on any one card or loan.
- 15% is based on your length of credit history: The longer you’ve been responsible with credit, the better your score gets. Unfortunately with this one, all you can do is wait and make sure that your oldest, positive credit account is on your reports.
- 10% is based on the types of loans you have: There are three types of loans available to you, installment, revolving, and store credit. The credit bureaus like to see that you have access to at least two of these types. Installment loans can be a car loan, mortgage, or student loan. A revolving line of credit is usually a typical credit card like a Visa or MasterCard. A store line of credit can be a gas card or a department store credit card.
- 10% is based on new credit: Credit bureaus may view you as a risk if you’ve opened too many accounts in too short a time period. This is based on how recently you’ve opened a new line of credit of any kind, and how many you’ve opened.
My latest action could potentially negatively affect my credit score because the card I canceled was one of my oldest, see point #3, and I opened a new credit card, see point #5. Only time will tell, and in the meantime, I’m saving $69.00 a year.