Closing Credit Cards Will Hurt Your Credit Score
How to Determine When to Close a Credit Card Account
May 2, 2009
Credit scoring is a very complex business. While everyone is now entitled to look at their credit reports for free once per year from each of the three credit bureaus by going to www.annualcreditreport.com, the bureaus do not provide a score. Individuals can check the reports for accuracy, such as no unauthorized accounts are open, no late payments are reported during months where payments were received on time, etc. Solid reports from all three credit bureaus will normally result in high credit scores, but there are some tricky things to look out for.
Length of Credit History
One of the elements of a strong credit score is the length of credit history, particularly with a single lender. For instance, a credit card opened in college should not be closed just because a consumer wants to use a different credit card. If the newest account is less than five years old, then the credit score will be negatively impacted. Part of the score looks for long-term relationships. Instead, open the new account, but continue to keep the older account open, even if it is not being used.
Amount of Debt
Another element is the debt-to-credit ratio. While conventional wisdom says to cancel a credit card with a $20,000 credit limit that is not being used, that could result in a lower credit score. However, if a consumer’s only other card is a $5,000 card, for instance, with a $2,500 balance, then closing the $10,000-limit card will increase the debt-to-credit ratio from 10% to 50%. Using 50% of one’s available credit (the debt-to-credit ratio) will negatively impact a credit score.
Of course other loans may offset a credit score as well. For instance, a $250,000 original mortgage with only a $125,000 balance remaining will have a positive impact on a credit score since the data indicates the consumer is clearly paying off the mortgage and has invested time and energy into the mortgage.
Amount of Available Credit
The flip side is if the consumer has too much available credit. For example, with an annual salary of $50,000 per year, the consumer may want to reduce the available credit to no more than his or her annual salary or reduce it to a 25% debt-to-credit ratio, whichever is larger.
Other Elements that Affect Credit Scores
There are many other elements that affect credit scores as well including any liens or judgments, late payments, settlements, bankruptcies, and more. Even applying for many different types of credit in a short time frame reflects poorly on one’s score as it gives the appearance of a credit hungry consumer, which is considered a higher risk.
One exception is that several credit inquiries appearing at one time on a credit report for the same type of loan, such as a home loan, will only count as one hit against the report and not multiple hits. Also, pre-approval offers received in the mail do not count against the consumer’s score since the credit card companies have not actually pulled a credit score, which would be illegal without the consumer’s permission.
For more specific advice on how to raise an individual score, it is best to seek advice from a local credit union or a community bank that is willing to assist. Most credit unions and banks have experts who can look at an individual’s score and credit reports to determine the best course of action in shortest amount of time to help improve a credit score.
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