Canceled cards boost debt utilization ratio
Dear Opening Credits,
I have accumulated five Capital One credit cards (signature, platinum, etc.). I only use one of these cards and always pay it off in full each month. Will it hurt my credit rating if I cancel four of these cards? Maybe I can ask them to increase the available credit on the one card? It is currently at $5,000. Thank you. -- Julie
It looks like you're one of Capital One's premium customers! And you can remain as such, even if you choose to trim some excess plastic.
A credit rating -- or more specifically a credit score -- is dependent on what is listed on your consumer credit reports. Currently, these five accounts are showing up on your credit reports, but is that all that's being reported? For example, you may have student, vehicle and home loans, as well as other credit cards issued by different creditors. Without being familiar with everything that's being reported on your credit reports, I can't tell you with certainty how your score will be affected by closing several cards -- or for how long -- but what I can do is give you some tips on how to best offset any temporary damage.
There are a multitude of credit scores, but since FICO is most commonly used, I'll cover what it takes to create and maintain an excellent score with this particular model.
The FICO score range spans from a bottom of 300 to a top of 850. Payment history is the most crucial factor, at 35 percent of the score, and if your Capital One cards are any indication of how you handle the rest of your financial obligations, you're doing very well. Even one late payment made in the recent past will drop the numbers. Conversely, years of paying all liabilities on time will work strongly in your favor.
Credit utilization, at 30 percent, is the next most important piece of the FICO puzzle -- and that's where your credit limit question comes in. For scoring purposes, it is best to keep the balances on revolving credit lines very low, with zero being best. You can lose points by regularly maxing out an account, even if you pay in full when the bill comes in. That's because the issuer may report the amount you owe before you send the payment and during the time your score is calculated. In this circumstance, it will seem like you're in over your head, causing your score to be downgraded.
There are several ways to offset this problem:
- Use a single card, but make multiple payments throughout the month. This way you'll never owe the same amount as your credit limit.
- Spread your charging out onto multiple cards, but keep the overall balances across all cards well below 30 percent of your cards' combined credit limits.
There is another method to preserve your credit rating, and it addresses your question about canceling unnecessary cards.
You see, FICO also takes the length of credit history and variety of accountsinto consideration. Together they comprise 25 percent of the score. Feel free to close accounts that are new and that you've never really used, as they aren't doing you any huge favors. Keep open the older accounts if possible. Before you close accounts, though, make sure you have sufficient borrowing power. If the $5,000 on a single account isn't enough for your lifestyle, keep that card and at least one more so you can charge what you want without running hard into the charging limits.
Still want to pare your accounts down to one card? Then, yes, call Capital One and ask if it will consider increasing the line on that card. Because you're clearly a valued cardholder, the issuer may agree. In the event your request is rejected, no worries: just hang on to the next best card in your wallet and rotate your spending -- shop with each, but don't charge up to the credit line on either. Your score will be impacted by closing a few cards, but without knowing more about your financial life, I can't predict by how much. But with continued good behavior across all your remaining, active accounts, it should rebound fairly quickly.
If you've been keeping track of FICO's percentages, you'll see that there is a remainder of 10 percent. This final scoring category is about the way you seek new credit cards and loans. As with debt, less is ideal. From now on, apply prudently, and only for the credit you're eligible for -- and truly need.
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Published: April 8, 2015
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