Most folks realize that credit scores are important, but many don’t realize that common misconceptions may cause some to unknowingly lower their own score. The issue of “too many credit cards” is often a highly debated topic of discussion. Most folks commonly assume it’s bad to have “too many” cards, and therefore should close those seldom used. This could be true, but then again, it could be wrong. First of all, like everything with credit scoring, there’s not one magic, “correct number” of credit cards. It all depends, because data on your credit cards is weighed against all other data in your credit report. But, it’s important to know that closing credit cards can lower your score.
• 30% of your FICO score is based on credit utilization, that is, the ratio between your balances and credit limits on your revolving credit. Cards are scored one at a time and then again collectively
• 15% of your FICO score is based on length of credit history.
When you close credit cards you reduce your credit limits and eliminate potentially helpful length of history. A separate analysis, unrelated to FICO scores, sometimes is made by mortgage lenders who see that a mortgage applicant could seriously change the debt-to-income ratio if the applicant used all of the available revolving credit. Even so, most mortgage lenders look at the FICO score first, so tread carefully
A trip to the doctor’s can quickly lead to a larger than expected bill and mounting debts, don’t make the mistake of overlooking these and simply assuming your insurance will cover everything. Even health insurance coverage may not be enough to prevent medical bills from causing financial distress. According to a report by Harvard’s law and medical schools, costly illnesses trigger about half of all personal bankruptcy filings. And most shockingly, more than 75% of those people had health insurance.
“Unless you’re Bill Gates, you’re just one serious illness away from bankruptcy,” said Dr. David Himmelstein, the study’s lead author and an associate professor of medicine. “Most of the medically bankrupt were average Americans who happened to get sick.”
The moral to this story? Have good insurance and prepare for the worst case situation. If you were hit by a car or diagnosed with cancer today would you have enough savings and available credit to help you get through it financially? Manage your credit accounts and understand how many credit accounts you may have open during a specific period of time is a good step towards properly managing your finances and credit scores in 2015.