Millions of consumers are now more wary of taking on credit card debt, or even using their accounts, as a result of the financial strains many faced during the recent recession, often through no fault of their own.
One strategy that many consumers now employ to help them avoid taking on large amounts of credit card debt is by eschewing the use of their cards altogether, be it by cutting up the card itself , freezing it or simply putting it away in a place where they do not have easy access to it, according to U.S. News and World Report. However, this may not always be a good idea, depending on the type of card they have.
For instance, consumers swearing off credit card use are only paying for the card’s annual fee, if they’re even doing that much, which means that the card issuer isn’t turning much of a profit, the report said. If this goes on for long periods of time, the lender can cancel the account without letting the borrower know, meaning they can take a hit on their credit score and, if they ever need to use the card in the event of an emergency, they won’t be able to.
But at the same time, many consumers who are working to get out of debt make similar a similar misstep, the report said. For instance, those who have made significant strides to reduce their debt and have gotten it to zero might close the account altogether when doing so, which can take a sizable chunk out of their credit scores. The average age of all the accounts a consumer has in their name is one of the factors the credit bureaus consider when compiling a consumer’s credit rating, so keeping these accounts open even after the entire balance has been paid off can be of the utmost importance.
Closing an account will also have a negative impact insofar as it will likely lower the total credit limit for all of a borrower’s various accounts, which will create a higher credit utilization ratio. This factor – simply the amount of debt versus the amount they are allowed to across all their accounts – is the second-largest when determining a credit score, and keeping this total between 20 and 30 percent of the total credit limit is generally recommended.
Image: Paalia, via Flickr