A credit counselor wrote: “Canceling all the cards you don’t use at once may affect your credit utilization ratio. This could hurt your credit score.”
Worried about just that, one reader, with an outstanding score of 800, wrote, “I took an unused card to the bank with the intention of closing it but was informed that closing the card, even though it had no balance and had not been used for quite some time, would lower my credit score. Is the bank employee correct?”
I understand people’s concerns about closing accounts. Clearly, credit matters. The way you handle your credit can impact loan and insurance rates.
But here’s my concern: People hear that it’s vital to have “good” credit and they think that means they need to carry debt. They are afraid to dump cards.
If you’ve established a history of responsible credit management by, among other things, paying your bills on time and keeping credit card balances low or paying them off every billing cycle, you’ll likely see minimal impact to your score by closing an account, according to experts from Equifax, Experian, TransUnion and FICO, the company that created the credit-scoring model used by most lenders.
As part of my discussion on getting rid of credit card clutter, I recommended that you not cancel any card if you’re carrying a balance on it or any other cards. I said that ultimately you could close accounts once all the cards had been paid off.
Ideally, if you have debt and you won’t be tempted to add to your credit mess, just put the cards away and work on paying off the debt. If you close an account and you still have debt on that card, it can increase your utilization rate, which is an important measure of how much credit you are using at any one time.
But if you know that having an open card is too much temptation, cancel it. Then commit to a plan to pay it off. Your utilization rate will improve as you pay down debt.
And contrary to what that bank employee told my reader, if you close an account that you’ve had for some time, its long history does not immediately disappear. Positive credit history can stay on your credit report for 10 years from the date the account was closed. It’s important to realize that after your credit score reaches a high enough level, minor changes won’t have significant impact on your credit history.
Let’s look at the FICO model. A score can range from a low of 300 to a high of 850. If a lender is giving its best rates to credit-worthy customers with scores of 750 or higher, it doesn’t matter what your score is if you are above that point.
Your score is constantly changing. It dips and rises based on a number of factors, including what you do in any given period as companies update your credit files with new information.
No matter what credit tier you are in, you certainly want to be aware of any moves that might negatively affect your score. But you need to look at the big picture, not just your credit score.
If you find yourself in some credit mess, don’t be afraid to clear the clutter.
Michelle Singletary welcomes comments and column ideas. Reach her in care of The Washington Post, 1150 15th St. N.W., Washington, DC 20071; or singletarym@washpost.com.
