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Don’t Cancel That Create Card! Closing Accounts Can Damage Your Credit Rating
Unless your idea of “streamlined” finances is having eight credit cards in your wallet (that’s about how many the average card-carrying U.S. citizen hauls around), you’ve probably considered canceling some of credit cards you don’t use often.
Before you dash off “Dear John” letters to your lenders, first make sure you’re not doing more harm than good by parting ways.
The truth about canceling credit cards
Do unused lines of credit hurt your credit score — or help it? Will removing old information about already closed accounts make you look more (or less) attractive to bankers?
Great questions. Let’s clear up some common misconceptions:
Closing accounts will not undo anything. Once a credit card is in play, there’s no denying its existence. It’s on your permanent record — your credit report — for at least seven years. Yes, even if you cancel the card the next day. Same goes for any red marks (late payments, charge-offs, overspending) associated with your accounts. Sorry, you simply can’t deny your past. But at least it will fade away and, for most negative entries, fall off your report in seven years. However, you might not want some entries to disappear …
Why deny the good? Removing old closed accounts that have no negative items is a bad idea because you benefit from a long credit history, and those accounts speak to that history. (Good entries can remain on your report forever.) Remember, 15% of your credit score is determined by how long you’ve been borrowing.
Closing accounts might hurt your FICO score. Lenders take a hard look at the ratio between the balances on your revolving accounts and your total available credit. If you do have debt, try to keep it to less than 30% of your available credit. (The ideal number here is, of course, 0%.) Go ahead and keep those lines of credit open, but don’t be tempted by untouched lines. When you close out open accounts, those credit lines are no longer factored into your ratio. Thus, your debt as a percentage of available credit will increase. Ouch.
Why cancel cards at all? It may sound like the lending industry loves customers who have gobs of plastic, but as with most things, it’s best not to binge. According to Fair Isaac, once you acquire more than seven revolving debt accounts, your FICO credit score begins to suffer a little. And while simply closing accounts won’t necessarily have an immediate positive effect, over time it could boost your credit score. So let’s see if it’s time to break up with some of your banks.
FOR CONTINUATION OF THIS STORY, CLICK THIS LINK FOR THE MOTLEY FOOL: Cancelling Credit Cards | Credit Card Help.
