closing credit card account and efect on credit score (pay, rates, credit report)
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I have some credit cards that I paid off several months ago. They've had zero balances since and I was thinking of closing them, but I heard closing credit card accounts can actually have a negative impact on your credit score. Is this true?
The rationale for this... well the person that told me this said, having more credit cards with empty balances actually looks good because that shows lenders that I have the credit worthiness to have all this line of credit, yet the self control not to run up the balances.
Whereas my thought behind in wanting to close them is so that a potential lender won't look at all the empty credit cards and worry that I may run up the balance after they lend money to me, thus deterring them from, say, giving me a mortgage.
There are other posts on this topic. The bottom line is that the formula that each credit bureau uses to calculate their 'score" as well as the inputs that Fair Issac use to brew up an FICO is a "trade secret". There is good evidence that the same actions (closing an inactive account) effects different people in different ways.
That said the basics are the same for all reporting agencies -- longer history of credit is better. Having more credit that is unused is better than have less credit that is all maxed is better. An excessive amount of available credit in relation to one's current income is not good.
I would recommend that you get your free credit report, examine it CLOSELY to make sure that all the good things are reflected and there are NO inaccurate entries.
If you are planning on doing some new borrowing soon (like a mortgage) I would NOT close any accounts.
If you do get a mortgage and you have not had one previously that mortgage is going to put you into a new category of borrower, and for a while it might be hard to get a new credit card account. Once you demonstrate you can manage to be ON TIME with your mortgage and your credit cards and you do not carry any balances your credit score will soar. If you then decide to close some credit accounts and perhaps refinance your mortgage you will be in the land of "easy credit" and as long you do not abuse it you should get the best rates...
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Never apply for credit or close accounts at least 6 months before mortgage shopping.
When you close accounts you will still retain the history of the account for about 10 years. You will lose the utilization from the cards, which could hurt if you have balances on any remaining cards or loans.
There are many factors that should be considered before starting to close accounts.
What is the overall age of your accounts?
How many cards do you have?
How many are you thinking of closing?
Do you have any low limit major credit cards (not store cards)?
If you have low limit major cards, what is the credit limits on those?
What is the total overall credit limit, on all cards, and how does it compare to your yearly income?
In the past, have you consistently carried high utilization on your cards?
Have you only occasionally carried a high balance?
Do you have negatives reporting? (collection accounts, late payments on non collection accounts, etc)
My credit score dropped 40 points when an account was closed accidently. When I called to have it reopened the vendor did, but my score did not recover the 40 points lost. I think that there is definitely a trend in credit scores to how much money banks are wanting to lend! It has no real rhyme or reason, just some made up rules. I have excellent credit , high limit available and very low balances and still my credit score just dropped 40 points in a week. When mortgage rates go down, so do credit scores----interesting... This whole system is Bulls...t
Last edited by tm1kelly; 09-23-2010 at 07:00 AM..
Reason: typing errors
My credit score dropped 40 points when an account was closed accidently. When I called to have it reopened the vendor did, but my score did not recover the 40 points lost. I think that there is definitely a trend in credit scores to how much money banks are wanting to lend! It has no real rhyme or reason, just some made up rules. I have excellent credit , high limit available and very low balances and still my credit score just dropped 40 points in a week. When mortgage rates go down, so do credit scores----interesting... This whole system is Bulls...t
Call the creditor directly and send a message to the credit agencies explaining that your score has been adversely affected, especially if you intend to make a large purchase soon.
If you have no intention of making a large purchase soon, I wouldn't worry too much about it. Your score will most likely correct itself in short time (providing the creditor did not really close and then reopen the account, thereby resetting your accounts longevity.)
My credit score dropped 40 points when an account was closed accidently. When I called to have it reopened the vendor did, but my score did not recover the 40 points lost. I think that there is definitely a trend in credit scores to how much money banks are wanting to lend! It has no real rhyme or reason, just some made up rules. I have excellent credit , high limit available and very low balances and still my credit score just dropped 40 points in a week. When mortgage rates go down, so do credit scores----interesting... This whole system is Bulls...t
I agree. It's a game, the best we can do is play to win.
DONT DO IT!!!! If its your oldest card i.e. "established history" it will KILL your score. My wife and I decided a few years ago to convert our credit card debt into a signature loan through our CU. Well in return they demanded we close a few of the cards to prove that we were trying to correct out debt situation. Well a few months later we applied for a car loan and my wifes credit was destroyed! Were talking going from ~680 to 450. All because the card we closed was her longest running debt so it appeared as though she only has been using credit cards for a year. Thats the story the Equifax guys gave us. I was so pissed.
My husband died, we had some joint credit cards with high limits, I closed them, my score dropped 60 points...bad move on my part. I am back up now, however, it took 5 years for it to do so....sucked.
I wouldn't close my oldest CC, if anything if it has sucky terms or low limit I would see about upgrading it to something with better terms or getting a CLI without actually needing to change the account number. Then if you still don't want to use it regularly, put a small purchase or pay bill with it every so often (6-12 months) just to keep the Trade Line open and reporting.
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