Money Management

How long you’ve had your credit cards plays a role in your credit score. Explore what can happen if you decide to close your oldest credit card. 

If you don’t use your oldest credit card anymore, you might be considering closing it. Lots of people find themselves in this situation, because as you build your credit, you can qualify for better cards. Once you have cards with more benefits, there often isn’t any reason to keep using an old card.

However, there’s also a common piece of advice to never close your oldest credit card. The amount of time you’ve had your credit cards is a factor in your credit score, so canceling your oldest one could negatively affect your score, or so the thinking goes. But that advice is missing some key information. Here’s what really happens when you close your oldest credit card.

That credit card remains on your credit history for 10 years

When your credit card is closed, it doesn’t get removed from your credit file immediately. Closed credit cards with a positive account history remain on your credit file for 10 years. During that time, they still count toward your credit score. All your payment and account history on that credit card can continue to benefit your credit. Cards with negative information stay on your credit file for seven years.

The idea that you’re going to lose your oldest credit account is misleading. You technically will, but not anytime soon.

By the time that closed card falls off your credit file, you’ll have had 10 years to build a lengthy credit history with another card. As long as you continue to use other credit cards, your score shouldn’t be affected at all.

It could impact your credit score through your credit utilization

While people often worry about what closing an old card will do to their credit history, the real potential issue is what it does to your credit utilization. Your credit utilization ratio measures the balances on your credit cards compared to their credit limits. It’s a major factor in your credit score, accounting for 30% under the widely used FICO® Score system.

When you close a credit card, you lose that card’s credit limit. If you’re carrying balances on any of your other credit cards, then your credit utilization will rise.

To give you an example, let’s say you have three credit cards:

That adds up to $5,000 in balances and $20,000 in credit limits, for a credit utilization of 25%. The recommended range is under 30%, so you’d be doing well overall.

Now, imagine you decide to close your oldest account, Card A. You lose its $10,000 credit limit. You now have $5,000 in balances and $10,000 in credit limits, pushing your utilization to 50%. That could hurt your credit score.

If you pay your credit card balances in full, credit utilization won’t be an issue. But if you’re carrying any balances, then it’s important to consider how closing a card would impact your credit utilization.

Other than credit utilization, there’s nothing to worry about when closing your oldest credit card. You’ll have 10 years before it comes off your credit report, giving you plenty of time to build more credit history with other cards. If you don’t want to hang on to an old credit card, it’s perfectly fine to call the card issuer and close it.

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Need a place to park your cash in June? Read on for some good options. 

Many people are struggling and stressed out these days due to factors like inflation and economic uncertainty. And unfortunately, a lot of people do not have a whole lot of cash at their disposal.

But what if you happen to have money you don’t need for bill-paying purposes? If so, it’s important to find the right home for your cash. Here are some options to look at.

1. A savings account

Because of all the recession warnings we keep hearing, it’s important to have a solid emergency fund — enough cash to cover at least three full months of essential bills. And that’s why a savings account is a great place to stash some cash this month.

Not only are some high-yield savings accounts paying around or more than 4% interest, but the money you put into a savings account is protected, provided your bank is FDIC insured. Granted, that protection runs out once your deposit per bank exceeds $250,000 (per person on the account), but for most people, that’s not a problem.

2. A certificate of deposit

Savings accounts happen to be paying generously these days. But you never know when your bank might start to pay less interest on your money. That’s a chance you take when you stick to a regular savings account.

With a certificate of deposit, or CD, you’re guaranteed the same interest rate for as long as your money is locked away. So if you sign a 12-month CD at 4.5%, you’re guaranteed that 4.5% for a full year.

Of course, the problem with opening a CD is cutting off access to your money, as you’re committing to keeping it tied up until your CD comes due. And tapping a CD early could result in penalties, which you don’t want. But if you have separate funds set aside for emergency savings purposes, you may want to stick your remaining cash into a CD for a nice risk-free return.

3. The stock market

Savings accounts and CDs are paying 4% or more these days, and that’s a nice return. But if you want an even higher return on your cash, consider investing it in stocks.

The stock market has averaged a 10% annual return over the past 50 years, as measured by the S&P 500 index. So, let’s say you have $5,000 to work with. If you were to invest it in a bunch of different stocks, sit back, and do nothing over the next 25 years, you’d end up with a little more than $54,000, assuming your portfolio gives you a 10% return over time.

Now, one thing you should know is that that 10% return is by no means guaranteed. In fact, unlike a savings account or CD, when you put money into stocks, you risk losing some. But if you fill your brokerage account with a diverse mix of investments and hold them for many years, there’s a good chance you’ll make money over time.

Where should you put your money this month?

Clearly, there are plenty of options when it comes to your spare cash. So think about factors like how important it is to have immediate access to your money and how much risk you want to take on when deciding where to put it.

Also, think about your goals for that cash. If your primary objective is to grow it through the years, then the stock market might be the optimal choice for you.

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Changes to credit reporting are benefiting consumers. Read on to learn more. 

There are different factors that go into calculating a credit score. These include length of credit history, new credit accounts, and credit utilization (or the amount of revolving credit being used at once). But the factor that carries more weight than any other when arriving at a credit score is payment history, which speaks to how timely consumers are with bills.

Not paying bills, or paying them late, has the potential to cause significant credit score damage. And a lower credit score could make it difficult to qualify for a loan or credit card.

But new data from the Consumer Financial Protection Bureau (CFPB) reveals that a recent change to credit reporting may be benefiting consumers big time from a credit score perspective. And if the change works to your advantage, you might see that your score is higher than it was in the past.

When medical debt no longer gets reported

The practice of reporting medical debt collections for sums under $500 came to an end in April this year. The CFPB estimated that 22.8 consumers had at least one instance of medical collections removed from their credit reports since then, while 15.6 million consumers had all medical collections removed. And that’s a very good thing.

The CFPB also found that consumers get a 25-point increase in their credit scores, on average, during the first quarter after their last medical collection is removed from their credit report. That increase climbs to 32 points for people with medical collections that amount to more than $500.

But it’s not just an uptick in credit scores that tends to result after medical debt is removed from credit reports. The CFPB also found that credit availability increases for consumers 18 months after their last medical collection is wiped from their credit reports. This, in turn, gives borrowers more opportunities to qualify for new credit cards and personal loans.

A very positive change

It’s unfortunate that in the context of a credit score, even a single late payment of a small amount could cause a world of damage. Now that smaller medical debts won’t stay on consumer credit reports, borrowers may have an easier time maintaining higher scores.

Not only are medical debts of under $500 no longer allowed on credit reports, but completely paid-off medical debts in higher amounts must be removed as well. If you have a smaller outstanding medical debt that’s gone to collections, or if you recently paid off a medical bill that’s been lingering, make sure to check your credit report to see if those items have been removed from your record. If not, contact the credit bureau behind your report and ask them to make that change.

At the same time, do your best to keep up with future medical bills, since debts above the $500 threshold have the potential to be reportable. If you can’t pay off a medical bill in full, ask your provider to get on a payment plan. You generally will not be reported as delinquent if you’re sticking to an installment agreement.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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Suze Orman believes credit scores should be a thing of the past. Here, we look at why. 

On their podcast Ask Suze and KT Anything, Suze Orman and her wife, Kathy Travis, answered a question regarding credit scores. According to Orman, credit scores should become a thing of the past. But does she have a point?

The role a credit score plays

The two major credit scoring models used in the U.S. are FICO® Score and VantageScore. They both offer scores ranging from a low of 300 to a high of 850. To achieve a credit score that lands in the “good” category, a person’s FICO® Score must fall between 670 and 739. For VantageScore, the range is between 661 and 780. Anything lower falls into “fair” or “poor” territory.

Some financial advisors, like Dave Ramsey, recommend followers allow their credit scores to go extinct. And if you never (ever) plan to apply for credit of any kind, Ramsey’s advice may make sense. After all, who needs a credit score? As it turns out, most of us do. Companies use credit scores to decide if you’re eligible for the following:

New mortgageCredit cardsAuto loanPersonal loan

Companies may also use your credit score to determine the following:

Your auto insurance rateInterest rateLoan credit limit

Who’s being squeezed?

A low (or extinct) credit score makes it expensive or even impossible for millions of Americans to get credit. Ultimately, it makes consumers more susceptible to predatory lending practices that trap them in a web of high-interest debt.

Still, as important as today’s credit scores are, Orman says, “If you ask me, we should get rid of FICO® Scores altogether because they do not really tabulate the truth of your situations.”

For a deeper understanding of why Orman may feel this way, let’s look at two tables. The first breaks FICO scores by how they are categorized. We’re using FICO® Score because it’s the most commonly used credit score model.

The following table shows how average scores break down by race.

These averages mean that millions of people fall below the average line, and millions are above that line. You’ll notice that the lowest scores belong to Black and Hispanic households. These households have more trouble qualifying for mortgages, credit cards, and other financial products.

The lower the credit score, the more likely a person will take out a payday or other predatory loan. A Pew Trust study found that payday loans disproportionately hurt African Americans. Black people comprise roughly 13% of the U.S. population, yet they take out 23% of all payday loans.

A low credit score could belong to anybody

If you’ve ever gone through a job layoff, serious illness, or loss of a partner, you know how quickly your financial situation can become dire, especially if you don’t have an emergency savings fund to fall back on.

Imagine a person whose partner has left the family home, taking with them an additional income source but leaving a pile of debt. The person left behind may find themselves swimming upstream, trying to pay down old debt while keeping up with everyday expenses. It’s not difficult to imagine that person’s credit score suffering.

Perhaps Orman’s point is that credit scores act as one more stumbling block to those most needing a loan, lower insurance rate, or rental application approval.

The hard truth is this: The current system calls for our financial behavior to be reported to a credit reporting agency. Whether it’s fair or not, the best we can do is attempt to keep our credit scores healthy.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

 Read More