day 76 - credit cards
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Many people are becoming more conscious of the need for making better personal finance decisions, thanks to the recession. They want to reduce their debt and stop relying on credit cards so much. In general, these are laudable goals, and can contribute to one’s financial security. However, one of the mistakes often made in these cases is to ask for a credit limit decrease — or close the credit account altogether — once some of the debt is paid off. While it may seem like a good idea at the time, the reality is that such moves can damage your credit score, making it difficult to get approved for mortgages, car loans and even get the best insurance premiums.

How decreased credit hurts your credit score

One of the important things considered in your credit score is how much available credit you have, and how much of it you are using. When you get a decrease in a credit line, all of a sudden you have less available credit. And if you still have some debt on other cards, the amount of debt you are using, compared with the total you have available, becomes dangerous. This can be extremely problematic for your credit score.

Another issue is a closed credit card account. Length of credit history is also important to your credit score. If you close a credit card that you have had for more than a few years, your credit history is shortened, lowering your credit score.

While you might be tempted to get rid of your available credit, it is wise to think twice. You might be hurting your personal finances more than you think.