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How to whittle down your credit card portfolio

Erica Sandberg

October 23, 2013

QDear Erica,

I got a balance transfer card with a one-year, zero percent APR period, and the time is almost up. I have paid the balance off completely. I never used the balance transfer card for purchases, as I have another credit card. I only want one card. Should I close the balance transfer card or the old one? Which would help or hurt my credit more? — Mason

AHi Mason,

Kudos! You have achieved what some cardholders have trouble with, and that's repaying a balance transfer within the introductory interest rate period. With nothing being added on to the debt, you've surely saved a bundle in finance fees.Ask Erica

I get the sense that you haven't accumulated debt on the first card, too, which is just as important. Too many people charge with the original credit card again when it's empty and run up a balance. Then they not only have the transferred debt on the new account to deal with, but a growing obligation on the other one as well.

Having just a single credit card is perfectly fine, but because you express the desire to improve your credit rating, there are some considerations to explore before canceling any account.

To help you know what to do, here are the two basic factors to look at when determining which card or cards ought to remain open for business.

The first is your credit reports and scores. Along with other borrowing data (such as for a car loan and mortgage), all lines of credit will be on your consumer credit report. How you've been managing them will be used by credit scoring models, such as FICO, with some information being more important than others. When it comes to the components of your FICO score, the most important factors are:

  • Payment history: 35 percent
  • Credit utilization (how much you owe compared to how much you can take out): 30 percent
  • Length of credit history (how long you've had and used credit): 15 percent
  • Types of credit in use (your credit mix): 10 percent
  • Inquiries (pursuit of new credit): 10 percent

As you can plainly see, what matters most for a good FICO score is to borrow over a long time period, but never pay late or keep large revolving debts. If you do that, you've got 80 percent of your score covered.

Still, closing your older card will eventually affect the length of your credit history and reduce the number of active accounts that count toward your credit mix. So, for straight scoring purposes, it would be better to keep your oldest card open.

The second consideration, however, is your personal credit needs. To me, this takes precedence over score-chasing. If you're going to keep just one card active, it should be the card that is best for you. For example, it ought to have:

  • The lowest APR. If you will ever make partial payments again, you'll want the finance charges to me minimal.
  • A sufficient credit line. Which card allows you to charge the most? Maybe the first lets you spend only $1,000, and the second gives you $10,000. The greater sum allows greater freedom — and a bigger buffer for emergencies.
  • Rewards. Can you build points for cash, goods and services with one card but not the other? You may want to go for the card that gives you a kickback for your spending.
  • Customer service. Let's not forget the power of great people. I like the ability to call my credit card company and get a real human on the phone immediately. Maybe you do, too. Look at both banks' service, from the people you deal with on the phone to the ease of online banking.

If you really want to create and maintain a fantastic credit rating, keep both cards alive. Use each occasionally, following the rules of scoring listed above. Still, I wouldn't worry about the rating so much if you'd rather pare the cards down to one. After analyzing the advantages of each, one should rise to the top. Keep that and cancel the other. If you use it well, you'll stay in the black, enjoy the benefits of the account and see your credit scores rise over time.

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