Dear Helaine: I'm in my late 20s with a good but short credit history. For the past three years, I've been aggressively paying down my student loan, and I expect to have it fully paid off by early next year. I also have one credit card through my credit union, which I use sparingly and pay off every month. I've only had this credit card for a year.
Since my student loan will no longer be on my credit report, I'd like to make sure I still have a strong credit score, and I am thinking a second credit card (preferably with airline miles) would be a good option. I know that closing my student loan could impact my credit a bit, and then opening the new account could do the same. What do you think? -- Future Score
Dear Future Score: Letters like yours are one of the things that make me want to scream -- and show the limits of the credit scoring system as it exists now. In any rational world, paying off your student loan would count as a positive. But in the crazy, mixed-up world of credit scores, it could be a negative, at least in the short run. That's because your average length of time of open credit will go down, says Anthony Davenport, the author of "Your Score: An Insider's Secrets to Understanding, Controlling and Protecting Your Credit Score."
What would I suggest? Since you have a relatively short and light credit history, a second card could help you out a bit over the long haul -- provided, that is, it's used in a way similar to what you are doing now.
The issue involves credit utilization. That's judged on a card-by-card basis. How does that work exactly? As Davenport puts it, pretend for a moment that you have a credit card with a limit of $5,000 and one with a limit of $10,000. If you put $1,000 on each card, your score is hurt more because of the $5,000 limit card.
One last note: Obviously, running up bills you can't pay is a negative, but it sounds like your habits are good, and you won't be doing that. And congrats on (almost) getting that student loan out of your life!
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