Why Too Many Credit Cards Can Hurt Your Credit Score
If you have bad credit and you are trying to re-establish it, congratulations. You are on the road to financial recovery. However, one of the things that can actually hold you back from this is having too many credit cards. Why?
Every time you apply for a credit card, someone looks at your credit history – and that will lower your score.
When you apply for a credit card or loan, someone looks at your credit history to see if you’re credit-worthy before they give it to you, and every time that happens, your credit score is negatively affected, albeit slightly. Doing this very occasionally is fine, but if you do it often, all of those enquiries will stack up on your credit history. This will look bad to lenders, and it will lower your overall credit score.
Financial tip:
Don’t apply for more credit cards as you work to rehabilitate bad credit; you’ll avoid unnecessary enquiries that could hurt you that way. Instead, work on paying off existing credit card balances. This will show lenders that you are financially responsible, and will improve your credit rating over time. Do NOT, however, close credit card accounts once you’ve paid them off, because this, too, will hurt you. The older a particular credit card account is, the more stable it makes you look, and lenders like that.
A higher debt-to-credit ratio makes you a bad risk for lenders.
Lenders look at your “debt-to credit ratio” every time you apply for a loan. This is the amount of credit you are currently using (your debt) divided by the full amount of credit you’ve been given. So, for example, if you are carrying $2500 in credit card debt and you’ve been given $10,000 total credit, you have a 25% debt-to-credit ratio.
Financial recovery tip: Keep your debt-to-credit ratio at no more than 35% to be attractive to lenders, lower if possible.
Minimum payments really only take care of interest, not the principal.
If you think you’re doing well and don’t have bad credit because you pay your minimum payments on your many credit cards every month, think again. Those minimum payments are going towards mostly interest, not principal, meaning that you’re stuck in a financial “black hole” that’s very difficult to get out of. It will take you years to pay off your credit card debt – and you’ll end up spending many times over the amount of money you originally spent to buy whatever items you purchased.In addition, this hurts your credit history and score too. Lenders see financial irresponsibility when they see that you live beyond your means by “living on credit,” and won’t view you as a good credit risk. This will also lower your credit score if your debt-to-credit ratio is high, as mentioned previously. The only fix is to pay more than the minimum whenever possible, something that’s much easier to do with fewer credit cards.
Financial tip:Make more than the minimum payment on your credit cards whenever possible, especially focusing on your high interest credit cards first, then moving on to lower interest cards once those are paid off. This will significantly reduce the interest you’re paying, and you’ll be out of debt faster.
Late payments hurt you more than you know.
The more credit cards you have, the harder they are to keep on top of. If you miss a payment because you can’t afford it or just forgot, your credit score will nose-dive. That’s because your payment history comprises a large percentage of your overall score. Nix the late payments to remain in good standing.
At Prudent, we can help you rehabilitate your credit history. Our team will educate you on how to best use your credit cards and make payments to start rehabilitate your credit.
Questions? Contact us and we’d be happy to answer them.