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Question: “I have good credit and own four credit cards with a combined credit limit of $24, 000. Three cards are at zero balance, and the other one has a balance of $100. I would like to close the newest card because I’ve only used it once. It has a credit limit of $2, 000. So if I close it, will it cause my credit score to drop?”

Answer:

The short answer to that question is yes, it can cause your credit score to drop. So many people mistakenly think that closing a credit account, a credit card in particular, might be beneficial to them in some way, or perhaps might even increase their credit rating.

Unfortunately, the exact opposite is most often the case. It will lower your credit score.

Now, you have to understand that your credit score is based on a host of factors, one of which is your credit utilization rate. Let me explain quickly what that means. Your credit utilization rate simply means the amount of credit you’ve charged versus how much credit you have available.

In your case, you said that you have $24, 000 available and a balance of only $100. That means your credit utilization rate is super low, less than 1%. That’s very outstanding, that’s stellar, which probably speaks to why you have a good credit rating.

But let’s say you charge $12, 000 out of the $24, 000 you had available. Well, that would mean you’d have a credit utilization rate of 50%, because you would have charged up half of your available credit.

Now, this credit card that you’re thinking about closing has a relatively small credit limit, $2, 000. So the fact that that’s only about 10% of your overall credit limit that you have combined, because you said you have $24, 000 available, tells me that the impact on your score might be minimal.

I also say that because you said that this is your newest card, meaning that you haven’t had it opened very long, although you didn’t specify how long you’ve had the four cards open.

But in general I tend to think that closing that one card would probably not do as much damage to you, for example, as it might to do somebody else, based on the most recent card… You know, based on us talking about you thinking about closing your most recent card, and based on the fact that that credit card only has a small limit.

So I hope this has been helpful to you. Sometimes, I know, people want to close cards because, you know, they have an annual fee, or because the interest rate on the card is way too high, and, you know, for that kind of situation, I might advise somebody to think about doing it or to close it after they make sure that they’ve had other cards for a longer period of time.

Those two issues, high interest rates or a big annual fee, don’t seem to be the issue with you. You indicated you only want to close the card just because you’ve only used it once.

My suggestion in general would be, “Oh, don’t worry about it too much. It’s probably just fine if you keep it open.” If you only use it once and you continue to have very infrequent credit usage, chances are the creditor, the bank issuer who issued you the card might, in fact, close it anyway, because increasingly, amid the current credit crunch, banks are, in fact, closing out credit limits when people haven’t used them.

Either way it goes, if they close the card or if you close the card, that part doesn’t play a role in your credit score. The credit score doesn’t take into account, in other words, who asks or who dictates that the credit card be closed.

What does matter are those factors that I mentioned before, your credit utilization rate and also the length of your credit history.

Remember, 15% of your credit history… I’m sorry, 15% of your credit score is based on the length of your credit history. Generally speaking, the longer a credit history you have established, the higher your FICO score will be.

Here’s how to get your FICO credit score free

Related articles

• How can I remove items from my credit report? (askthemoneycoach.com)
• Recommended reading: Perfect Credit: 7 Steps to a Great Credit Rating

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Question: “I have good credit and own four credit cards with a combined credit limit of $24, 000. Three cards are at zero balance, and the other one has a balance of $100. I would like to close the newest card because I’ve only used it once. It has a credit limit of $2, 000. So if I close it, will it cause my credit score to drop?”

Answer:

The short answer to that question is yes, it can cause your credit score to drop. So many people mistakenly think that closing a credit account, a credit card in particular, might be beneficial to them in some way, or perhaps might even increase their credit rating.

Unfortunately, the exact opposite is most often the case. It will lower your credit score.

Now, you have to understand that your credit score is based on a host of factors, one of which is your credit utilization rate. Let me explain quickly what that means. Your credit utilization rate simply means the amount of credit you’ve charged versus how much credit you have available.

In your case, you said that you have $24, 000 available and a balance of only $100. That means your credit utilization rate is super low, less than 1%. That’s very outstanding, that’s stellar, which probably speaks to why you have a good credit rating.

But let’s say you charge $12, 000 out of the $24, 000 you had available. Well, that would mean you’d have a credit utilization rate of 50%, because you would have charged up half of your available credit.

Now, this credit card that you’re thinking about closing has a relatively small credit limit, $2, 000. So the fact that that’s only about 10% of your overall credit limit that you have combined, because you said you have $24, 000 available, tells me that the impact on your score might be minimal.

I also say that because you said that this is your newest card, meaning that you haven’t had it opened very long, although you didn’t specify how long you’ve had the four cards open.

But in general I tend to think that closing that one card would probably not do as much damage to you, for example, as it might to do somebody else, based on the most recent card… You know, based on us talking about you thinking about closing your most recent card, and based on the fact that that credit card only has a small limit.

So I hope this has been helpful to you. Sometimes, I know, people want to close cards because, you know, they have an annual fee, or because the interest rate on the card is way too high, and, you know, for that kind of situation, I might advise somebody to think about doing it or to close it after they make sure that they’ve had other cards for a longer period of time.

Those two issues, high interest rates or a big annual fee, don’t seem to be the issue with you. You indicated you only want to close the card just because you’ve only used it once.

My suggestion in general would be, “Oh, don’t worry about it too much. It’s probably just fine if you keep it open.” If you only use it once and you continue to have very infrequent credit usage, chances are the creditor, the bank issuer who issued you the card might, in fact, close it anyway, because increasingly, amid the current credit crunch, banks are, in fact, closing out credit limits when people haven’t used them.

Either way it goes, if they close the card or if you close the card, that part doesn’t play a role in your credit score. The credit score doesn’t take into account, in other words, who asks or who dictates that the credit card be closed.

What does matter are those factors that I mentioned before, your credit utilization rate and also the length of your credit history.

Remember, 15% of your credit history… I’m sorry, 15% of your credit score is based on the length of your credit history. Generally speaking, the longer a credit history you have established, the higher your FICO score will be.

Here’s how to get your FICO credit score free

Related articles

• How can I remove items from my credit report? (askthemoneycoach.com)
• Recommended reading: Perfect Credit: 7 Steps to a Great Credit Rating

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Q: I Have 6 Major Credit Cards and Several Department Store Credit Cards. I Want to Close Some of These Cards But Don’t Want to Hurt My FICO Scores Which are Currently Around 700 to 720. Should I Close the Newest Cards and Keep the Cards that are the Oldest? I Would Also Like to Completely Close all of the Department Store Cards?

A: If those major credit cards are costing you money, in terms of high annual fees, then you might consider gradually closing two or three of them over a one-to-two year period. But if they’re not costing you money, then I’d strongly recommend that you just keep the cards open and simply stop using them if you have no need for them. The reason you should not close those cards – nor close your department store cards – is that you will lower your available credit, which is a factor in determining your FICO score. Additionally, those cards are helping to establish the length of your credit history, another component of your credit score. Read the following article for information about how your credit scores are calculated and tips on boosting your FICO scores.

There is a lot of misinformation about what goes into your credit score. However, Fair Isaac officials have said many times that this is the heart of what happens: Your credit files – currently those from Equifax and TransUnion – are reviewed. Certain information (roughly 22 items) about how you’ve managed your credit is statistically analyzed. Ultimately, five different categories are weighted to produce your FICO score. Here is the breakdown of those five areas that contribute to your FICO score:

The Formula That Governs Your FICO Score

1.    Payment History: Approximately 35% of your score is based on this category.
2.    Amounts Owed: About 30% of your score is based on this category.
3.    Length of Credit History: Roughly 15% of your score is based on this category.
4.    New Credit: Around 10% of your score is based on this category.
5.    Types of Credit in Use: About 10% of your credit score is based on this category.

Based on this information, as well as other advice FICO freely disseminates on its website (http://www.myfico.com) and elsewhere, you can draw some good general conclusions about what actions can help your credit – and what could hurt it. For example, to increase your credit scores:

    Pay Your Bills on Time
    Payment track record is the largest component of your FICO score
    Even if you must make “minimum” payments, do it!
    One late payment can drop your FICO score by 60 to 110 points

    Maintain Low Credit Card Balances
    Don’t “max out” any cards
    Try to not to use up too much of your available credit limit
    Spread out debt over several cards instead of carrying big balances

    Keep Your Older, Established Accounts Open
    Longer credit history is scored favorably
    Resist the urge to close an account when you pay it off
    Closing accounts can sometimes lower your FICO credit scores

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