by Tricia
First of all, thank you everyone for the well wishes with feeling better. Today I do feel a little bit better. I think with traveling I probably picked up a bug or something.
Yesterday I discussed how I paid off Credit Card #6 and how I want to close it. Some of you mentioned that I might not want to close it for it could affect a FICO score.
From everything that I read, closing your card can affect your FICO score in two ways:
1.) Length of credit history. Something that FICO scores take into consideration is the length of history in regards to your open lines of credit. The longer you have a card, the better it is for your FICO score.
2.) Your debt to credit limit ratio. When you close a card, you are losing whatever credit limit they gave you. When you do that, you are raising your debt to credit limit ratio (for the most part). Here’s an example using my numbers (please note I removed the balance due on my Prosper loan here, but I include that amount within my credit card debt totals for my updates).
Total Credit Limit = $57,000
Total Debt = $22,700
We are currently using around 40% of our total credit limit available.
If I close CC#6, our total credit limit will be reduced to $55,000 and we will be using almost 41% of our total credit limit available.
Since CC#6 is one of the more recent cards, it shouldn’t affect the length of our credit history too much since it was just opened this year. We have older cards that are still open. As for the debt to credit limit ratio, a slight decline of 1% probably will not do much overall to reduce our FICO score.
Now, I do have one credit card with a limit over $25,000 that has a zero balance. No matter what the terms are on that card, I will keep it open. It is the card that I’ve had the longest (and started it all with our credit card debt) and it has a huge balance not being used. If I closed that card, our debt to credit limit ratio would skyrocket.
So, if you are wondering about closing any of your cards, take a look at the impact it will have on the points I mentioned above. It may be best just to keep cards, sign up for online access and receive balance emails (if you can) to monitor for unauthorized use (also check the statements). If you are worried about using your cards, a safe place you could store them is a safe deposit box at the bank.
For more info on figuring out the age of your credit cards, check out this article at Blueprint for Financial Prosperity. He goes more in depth.
While I’ve heard all of the “don’t close it cause it will cause your score to go up” rational before, I also think you have to take into account your overall goals… and what a FICO really means in your life.
In my mind, your goal, in addition to getting out of debt, is to be the picture of financial health… to be that, I think one card with a reasonable credit limit and low interest rate is the most responsible… (until you can get to the point of not needing any cards ever)
Now if you’re thinking of a new mortgage in the next two years, or know you’ll be in the market for an auto loan, sure… play the FICO game. Do all you can to prop that up… but if you’re not, in the long term, fewer will be better for you.
I can think of one other reason closing a credit card can impact your credit rating – one that happened to me.
I had several cards with low limits from the same company. I called up and canceled these cards. Thinking everything was OK I just went on my merry way until two months later I got an overdue notice and a $100 bill (I don’t remember the exact amount, but it was plenty). I called the company, got a rep in India (the first one that I cancelled with was from the US). I explained that I had canceled the card and there should be no charges.
Turns out this particular card had some kind of annual fee. Even though the balance was zero (and had been for some time) the annual fee was charged AFTER I had closed the account. Next month I was charged with a late fee which, of course, showed up on my credit report. The Indian sales rep was very helpful, reversed the incorrect charges and closed the accounts, but the credit card company did not bother to have the items removed from my credit report.
The moral of the story is be SURE your account is canceled and no additional fees are charged.
Good point. Most people in a haste to cut off their debt cancel cards after paying it off…or making a balance transfer from that card. That’s not good….In fact I have done that once a long time ago when I wasn’t aware about how these things work.
I never thought about the effects of closing a card; this would have changed how I did a few things in the past. I guess this would explain why I was having some difficulties trying to transfer all my debt onto one card. I guess I’ll keep that second card open even if I don’t use it.
I’ve also closed a credit card account when I was done paying it off. But I do see the errors of my way.
Excellent article.
I am a mortgage broker & most of the lenders I deal with *ALL* want to see at least one ACTIVE credit line.
Even if you buy gum from the store once a month & pay it off each month, they don’t care. They just want to see that you have credit and use it.
So if you are in the game (looking for a loan of any sort) keep at least on card active.
If you are the type that if you have it (credit) you have to use it, fine, just reduce the available credit limit. Oh, and keep your balances below 75% of the total available.