What's the credit score impact of closing a new credit card?
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.
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Dear Opening Credits,
I just activated a credit
card with US Bank thinking it was my newly opened checking account card. I have
two other credit cards carrying balances, but I pay them off in full each month. Will canceling the US Bank credit card hurt my credit score? -- Kathy
Want to know what's in a can of Coke?
Easy. Just look at the list of ingredients. You'll see carbonated water, some
sort of sugar, caramel color -- and the ever-mysterious "natural flavoring."
Same goes for credit scores. The companies
that develop these numerical assessment tools (the most common being the FICO
score) does make known the basics of what goes into their mathematical models.
But are they going to reveal the exact formula? Of course not. As with the
famous soft drink, that's proprietary information. If everyone knew what goes
into their "natural flavoring," others would replicate it.
So back to your question: How does a
credit card that you opened for a brief moment and close soon after affect your
credit score? A little, maybe, but probably not by much or for very long. It's
because the credit scoring recipe is brief and basic:
- 35 percent payment history
- 30 percent amounts owed
- 15 percent length of credit history
- 10 percent types of credit in use
- 10 percent new credit
Let's speculate how closing the account
will impact your score using the formula above.
You activated an account but did not
use it, so there is nothing in the first three (and most-important) categories to
weigh. Therefore, the activity you described would most likely fall in the
least-significant sections. Combined, those two comprise only about 20 percent
of a total score. This is why I believe those numbers will experience a ding,
but a minor one. So don't worry. If you don't want or need the card, go ahead
and cancel it.
In the meantime, you seem to be doing
all the right things with your other two accounts. You're charging away, but
paying the balances off every month. That's great! Your credit reports and
scores are reflecting that positive behavior.
I do suggest that you obtain your FICO
scores now, so you can keep an eye on any upward or downward movement. These
digits are constantly in a state of flux. You can order them from myFICO.com
(they're about $20 apiece from each of the big three credit bureaus), and
if you'll be applying for a car or home loan in the near future, you'll want to
be sure that they are as good as possible. High scores, plus a solid income,
help in getting great rates and terms. Credit scores in the mid-700s and above
are desirable, so if they're not quite there yet, increase your positive credit
activity for a few months. Charge regularly, reduce any other liabilities (including
existing vehicle, home and student loans) and never pay late or miss a payment
Finally, don't worry about minor
fluctuations in your credit score. It is always going up or down a little.
Focus on the weightiest factors and follow the general guidelines. That
should be enough to keep your numbers in the right range.
See related: Protect credit scores when canceling a credit card
Erica Sandberg's articles and insight are featured in such publications as the Wall Street Journal, Pregnancy, Babytalk, Redbook, Bank Investment Consultant, Prosper.com, MSNMoney.com, and Smartmoney.com. An active television and radio commentator, Erica is the credit and money management expert for San Francisco’s KRON-TV, a frequent guest on Forbes Video Network, Fox Business News, Businessweek-TV, and all Bay Area networks. Prior to launching her own reporting and consulting business, she was affiliated with Consumer Credit Counseling Services of San Francisco where she counseled individuals, conducted educational workshops, and led the media relations department. Erica is a member of the Society of American Business Editors and Writers, and on the advisory committee for Project Money.
Send your question to Erica.
Published: January 16, 2013
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