It’s tempting for college students and grads to sign up for an in-store credit card or a rewards card to snag discounts and special offers. But experts warn these short-term gains could be counterproductive to building a positive credit history.
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“Every time you apply, you’re potentially putting strain on your new and burgeoning credit history, even if you don’t use the credit, just having it available to you can make you look risky to future lenders,” says Ben Woolsey, director of marketing and consumer research for CreditCards.com. “As a student, you don’t really have that need to have more than one credit card.”
According to a 2009 survey by Sallie Mae, 91% of undergraduates have at least one credit card, up from 76% in the same study conducted in 2004, with half of college students having four or more cards.
Opening a new credit card generates a hard inquiry with the lender requesting an applicant’s credit score, which can ding their credit score.
The CARD Act of 2009 prevents students under age 21 from applying for credit cards without proven income or a co-signer on the account and establishing a credit history in a responsible manner early in their adulthood is in every students’ interest.
“It can determine their future interest rates on various things that they’ll go into after they graduate, like a car payment, buying a home and also maybe car insurance,” says Deatra Riley, financial education manager at CredAbility.
For students and grads on the fence about reasons for cancelling a card, here’s how credit experts say to complete the process without damaging their credit history.
When NOT to Close a Card
The experts suggest students and grads maintain the credit account they’ve had the longest, especially since they have a very short credit history to begin with and length of credit is an important component of a strong credit score.
“Typically it’s a good idea to hang onto that [first card] potentially forever--even if the interest rate is too high, it’s best to get it paid off and stick it in a drawer until you find a better credit card down the road,” says Woolsey.
If grads are looking to take out a loan or apply for a new card, it’s not a good idea to close any accounts or do anything to lower their score, warns Beverly Harzog, author and credit card expert. (http://www.beverlyharzog.com/)
“A lower score will lead to less favorable terms,” she says. “You might have to pay a higher interest rate because your score dropped a little.”
When to Close a Card
If students have a card with a high interest rate or annual fees that are difficult to keep pace with, it may be time to close that account.
“Student cards typically have higher rates because students are a higher credit risk so banks typically charge more interest,” Woolsey says.
While it’s a good practice to pay off the balance at the end of each month, it’s especially important to get the balance down to zero or look into balance transfer cards offering a 0% intro APR, suggests Harzog.
“This give you an opportunity to pay off the debt interest-free during the intro period but you need excellent credit to qualify for the best offers, so keep that in mind,” she says.
Woolsey cautions against remaining residual interest if another billing cycle has started—make sure the balance is zero before requesting the account be closed.
Maintain a Low Utilization Rate
Closing accounts can impact utilization ratio, or the amount of credit used compared to the amount of credit available, explains Harzog.
“If you close an account, you lose the amount of credit associated with that card. This increases your utilization ratio and a high utilization ratio can lower your FICO score,” she says.
The experts recommend students and grads either open a credit card with a similar credit limit or request an increase in credit line for an existing card to help push down the utilization amount.
How to Close an Account
Borrowers can request their account be closed by email, phone, or mail, but stay in touch with the credit card issuer to make sure it is closed properly.
“Check your account online, but also call the credit card company and confirm that balance is zero and that you're closing the account,” says Harzog.
If an account representative tries to talk a borrower out of closing the account, Woolsey recommends to politely but firmly stand their ground.
“They are incented to keep you as a customer and sometimes it’s part of their job and other times they actually get paid by the bank to save you and keep you from closing your account,” he says. “As the customer, you have the right to just say no, I want to close the account.”
It can take weeks or even months for the account to list as officially closed, and experts recommend requesting written confirmation from the company when it is no longer active.
In addition to pulling a free credit report once a year from AnnualCreditReport.com to make sure everything is accurate, it’s important for students and graduates to take the time and really understand the conditions of any credit card, says Riley.
“College students are just beginning to process credit and it’s very important that they are taking time to read the contracts. If they don’t understand the terms of their contract, pick up the phone and ask a representative at the 800 number.”