Today’s episode will be all about the length of your credit history. The FICO Score contains your credit information on reports. This is an important tool for lenders because they will know if you have been responsible with your credit card payments. Here you will get a different perspective on why you should never close a credit card. This is what your FICO score is composed of:
- 35% goes to timely payments
- 30% goes to the amount that you owe
- 15% is going to go towards your credit history length
- The remaining 10% represents your credit mix (meaning credit cards, car loans, mortgage loans).
The other 10% belongs to any new credit that you get from the bank.
Never close a Credit Card: the importance of the credit history
Even though it’s only 15%, and you should always focus more on the 35% and 30%, that doesn’t mean you have to let go of the importance of the 15%.
On the 15% side, we’re talking about the length of credit history. For example, you go to the bank, and your credit history, it’s only six months long. Then, another person comes in, and their credit is 24 months long. Then, someone else comes into the picture, and his or her credit, it’s 48 months long.
From a lender’s perspective or a bank perspective, you need the evidence to see that this person has been responsible with their previous payments and compromises with his mortgages or any credit they have had.
Evidence translates to, “Oh, maybe I want to see 24 months of timely payments. I want to see 24 months worth of credit history to show me that this person has been responsible for managing their credit.”
What about if someone shows up a 48 months credit history? You will most likely want to give the opportunity to someone who has been able to prove that they’re responsible the longest.
Maintaining a good length in your credit history is very important to determine whether you are a person who is:
1. Lendable
2. Financially responsible
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Never close a Credit Card: What happens if you want to close a credit card?
This is what’s going to happen: Let’s assume that before, you had a total of four credit cards. In those four credit cards, you have different credit length. One, let’s assume it was for two years. You have another one that is good for 10 years, and then you have another card with a history of eight years. Then, lastly, you have another one with a history of five years.
When you take 2 years, 10 years, 8 and 5, and then you average it to four different cards, you will have approximately an average of 6.25.
You’re going to have a credit history average of roughly about six years. What happens if you want to eliminate one of your credit cards is that when you do the math to get your average credit history, you will be dividing that by three because now you have one less card, and that will give you an average of five years. You’re actually eliminating one-year worth of credit history in your profile.
Just imagine if you start to close a credit card, and then another and so on. You went from having a credit history of 10 years down to two years, or maybe down to one year, perhaps even worse, down to six months. Would you want to go backwards? If you have a credit of six months, don’t worry. You will eventually get to the 12-month mark, the 24-month mark, or the 48-month mark.
What are the things that you can do to continue to maintain your credit history without having to close a credit card or shortening some of that credit history?
1. You can freeze your account. It’s as simple as just making a quick phone call, calling the bank and ask them what you need to do. That’s it. You get to maintain that credit history, the bank won’t go ahead and cancel it because of the lack of use. You can still maintain that long credit history and help you continue to boost that FICO score that you have.
2. If you’re trying to figure out how to keep them active in the best way possible, what you’re going to do is to assign each credit card a role. Now, each card has a role in your life. Card number one is going to take care of gas payments, anything that’s related to gas or transportation payments. Card two will be groceries only. Card number three will be your cell phone. Card four will be your internet. The last card will be for electricity.
Why you should never close a credit card: Utilities
You’re not spending any additional money. You’re spending the same amount of money. What you do is that you’re changing the source now. Before, you would typically take cash or your debit card to buy gas or to pay for your groceries.
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What you’re going to do from now on is that you’re not going to use your cash anymore. You’re actually going to sign one credit card. If it becomes very difficult, it’s very easy to sort it out. All you got to do is just take a card and take a marker, and just write on top of it what the card is going to be assigned for.
You write gas on the very top of it. You write groceries on top of it. That way, when you’re searching through your wallet, you’re going to know exactly what you are going to use that card for.
After you make your purchases, what you’re going to do is that you’re going to take the same amount of money, the same cash that you would normally use to make those expenses. You’re going to use that same cash and pay off this credit card, each and one of those credit cards.
The wonderful benefits that you get out of it is:
– You get to build a very strong credit history
– You will learn how to use your credit responsibly
– You will have the opportunity to make timely payments
– You’re going to reap the benefits of cashback
– You’re going to accumulate points
Whether you want to use those points to travel for free, or you want to use those points as cashback, so that way it can help you pay off some of this debt. If you don’t know how to use those points to pay off your debt, enter this link.
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