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.