Why keeping an old credit card is good for your credit score

Mogo’s credit score expert, Chantel Chapman, discusses the effect that different types and lengths of credit have on your credit score.

This article is part of our ongoing series on what impacts your credit score. Last week, we discussed credit inquiries (also known as credit checks) and how these lender inquiries can affect your credit score. Inquiries make up 10 per cent of your overall credit score.

In case you need a refresher, your credit score is basically your adult report card. It’s a great indicator of your financial health and it’s used to determine your eligibility for things like getting a mortgage or even renting a property.

There are several factors that affect your credit score, and this week we’re focusing on two factors that collectively make up 25 per cent of your credit score: length of credit and types of credit.

In general, the longer you’ve had a credit product for, the better. And different types of credit products (credit cards, lines of credit, loans) will also affect your credit score.

This assumes that you’re making your minimum payments every month, and practising good utilization ratio behaviour.

Types of credit (10 per cent of your credit score)

It’s good to have a mix of different types of credit. There are two types of credit products: revolving and instalment.

Products like credit cards and lines of credit are considered ‘revolving’ because when you pay them down, the credit becomes available to you again. Whereas with instalment credit, it’s repaid over time with a fixed number of scheduled payments. Revolving credit like credit cards and lines of credit are riskier than personal loans so it’s better to have fewer of those in your mix.

Having 10 active credit cards can look a little suspicious to a lender, so a mix of revolving and instalment is better.

Think of it like this: Instalment credit is typically used for something that has an asset or value attached to it (for example, a student loan, a car loan, a business loan or a home improvement loan) whereas revolving credit (like credit cards) are typically used for day-to-day spending.

Rock star credit tip

If revolving credit and the ability to re-borrow what you pay back each month has got the best of you, it’s actually in your benefit to pay off that revolving credit with an instalment loan (like a Mogo Money loan), and give your credit card a break. This will get you on a clear plan to being debtfree while keeping your credit utilization ratio in check.

Length of credit (15 per cent of your credit score)

The longer you have an account open, the better. Think of it as a good track record. It shows that you are capable of managing credit responsibly.

If you have a few credit cards but want to close one or two, don’t close your oldest card, even if your new card has better rewards. Instead, keep the card active and set up any automated monthly payments on that credit card (like your Netflix subscription), an automated payment schedule to ensure the amount is paid off every month, and hide the card away.

This way, you’ll be showing the credit bureau you can have different types of credit, for a long period of time, and you can also make on-time payments.

The first step in having a great credit history is knowing your credit score. Ideally, you should also be aware of how it changes from month to month, so you can make sure you’re on the track to good financial health.

You can get your Equifax credit score at no charge with free monthly monitoring at mogo.ca.

Checking your score with Mogo does not impact your credit score.