I am often tempted, as I stand at the checkout counter of a retail store, to open up a credit card for that store. The discounts and perks are enticing, so why not just open the card, use it, pay it off, and then close it? As simple as that sounds, I decided it was probably a good idea to do some research first (Ok, maybe I have already opened a few and now I realize it’s time to do some research. From our credit counseling perspective, you can never do too much research!).
Should I open the card? Does it hurt my credit score to have unused cards? Will it hurt my credit score to close the card accounts not being used?
First of all, unlike mortgage, auto, or student loan applications, each time you apply for a new credit card, a “hard inquiry” shows up on your credit report. This type of inquiry causes a drop in your credit score and will stay on your report for two years. Also, adding debt to a new credit card in your repertoire also increases your debt to credit ratio (for FICO scores this accounts for 30% of your score).
Ok, so I shouldn’t open the store credit card at all. But what about the cards I have already opened? Experts say that the best-case scenario is for store cardholders to pay off their balances quickly to reduce their utilization. Utilization is the ratio of your credit card balances to credit limits as listed on your credit report. For example, if your balance is $300 and your credit limit is $1,000, then your credit utilization is 30%. You want to try to keep your credit utilization low; this shows you’re only using a small amount of the credit that’s been issued to you. By always keeping no balance or a low balance on your credit card you can decrease your credit utilization and your credit score will go up.
So, what do you do once the balance is at zero? Since having open cards in good standing can be helpful to your score, it is not necessarily a good idea to close the card. By closing the account you actually lose the benefit of having an unused credit limit (lower credit utilization).
To summarize, while you may not hurt your credit score too much if you close the accounts, your score won’t benefit, either. You can actually improve your credit score over time by leaving the store credit card accounts open, paying them on time and keeping balances on them low or zero.
If you’re struggling to pay off debt, ACCC can help. Schedule a free credit counseling session with us today.