Does Consolidating Credit Cards Hurt Your Credit?
It seems intuitive that consolidating your credit cards would be a good thing. After all, experts warn against having too many credit cards, so cutting down the number should be all good news. But, does consolidating credit cards actually hurt your credit?
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Significance
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When it comes to credit cards, it is easy to have too many, so consolidating credit cards is one way to lower the overall number. Consolidating credit cards simply means to transfer whatever balance is on one card, if any, to another account and then to close the account the balance was transferred from. Thus, what was once two credit card accounts becomes just one. However, this also makes a big change to your credit as an entire account drops off.
Benefits
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Consolidating credit cards can provide benefits for your credit. One aspect of a credit score is the amount of total debt available to the consumer. All other things being equal, a person with $20,000 of total available credit would have better credit than a person with $50,000 of total available credit. The idea is that a person with a lower total limit can't continue borrowing and thus increase the odds that at least one creditor might not be repaid in a timely manner.
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Effects
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While having a lower amount of credit available is a positive thing for a person's credit, there are many other factors involved. For example, one factor that figures into a person's credit is how "old" their credit history is. If one of the cards being canceled happens to be the oldest card the person had, then the length of their credit history will be shortened and thus their credit score lowered. Another important factor is the ratio of used credit to credit available. Thus, a person with $20,000 in total available credit who has balances of $15,000 would have lower credit than a person with $30,000 in total available credit and the same balance.
Considerations
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A person with too many credit cards should likely consolidate for reasons beyond helping their credit. However, if certain things are taken into consideration, the negative affect on the credit could be negligible or short lived. When deciding which cards to keep, cards with low rates and no annual fees should be kept while higher rate cards and those with fees should be closed. But if two cards are similar, then keep the oldest of the two to avoid shortening credit history. Likewise, between two similar cards, keep the one with the higher limit to reduce the affect of the balance to limit ratio.
Time Frame
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Credit is not static, nor is it exact. A person's credit can go up or down each month without making any changes in the overall situation, so it is important not to overreact to short term changes. Consolidating credit cards may result in a short term drop in credit score, but may be the better for a person's credit in the long run. The best way to increase credit strength is to pay all bills in a timely and consistent manner.
Misconceptions
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Many people assume that if they pay their credit card balance off each month that their credit is based on having a zero balance. This is usually not the case. Most people actually pay off the statement balance which means that while their payment results in no interest charges, it does not necessarily reduce the balance to zero due to charges made after the statement date which are not due until the next month. Also, credit reports rely on data provided by the lender. If a lender reports the balance on the 15th but the payment isn't due until the 25th, the balance that is reported may include the amount that will be paid off in 10 days.
Expert Insight
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Always do what is right for your personal financial situation. Your credit should be a secondary consideration. Nothing yields a higher score than consistently using credit in a responsible way and making consistent payments. Do that, and things like consolidating credit cards will be the difference between a 779 score and a 754 score, both of which will almost always be considered the highest tier credit.
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