Consider these factors when deciding to cancel credit cardsThere's more to canceling a card than just cutting it upBy Karin Price Mueller
Dear Opening Credits,
I am currently in my first year of dental school and am working on building my credit score so that after I graduate in three years, I can be in a good position to possibly buy a house or car. Currently, my credit score is poor. I have:
- Five store cards that are open with zero balances.
- A MasterCard with a $50 annual fee that has been open for one year with a zero balance.
- A Visa that has a $50 annual fee that has been open for 18 months. It has a balance that I plan to pay off by August 2009.
- Two Visas with no annual fees that I plan to pay off by August 2009 with no fees.
- Two other Visas that were closed by the lender due to former late payments. I still have balances on these cards that will be paid off by July 2009.
I want to close some of these accounts, but I'm not sure which ones to close and how that will hurt my score. How bad would it be to close the five open store cards and the two open Visas with the $50 fees? These seven cards have zero balances. Should I close them all at one time? -- Getting it together
Dear Getting,
You certainly do have a lot of credit cards, and you're smart to worry about the right way to close accounts you no longer need or want.
First, though, you say you already have a poor credit score. I'm sure you've realized that late and missed payments are probably what got you there, and I hope you've resolved to never make those mistakes again.
It does seem that you're on the right track to improving your score, planning to pay off both the overdue balances on the cards that were closed and the balances on your cards in good standing.
"Paying bills on time is generally the single most important contributor to a good credit score," says Susan Thomas of the credit bureau Experian. "Being late on any bill, for any length of time, is a possible indication of future nonpayment of debt and is almost always viewed negatively by lenders."
So going forward, make sure you pay on time, even if you only pay the minimum.
Now, on to closing some accounts. I understand why you may want to get rid of the accounts, but doing so can harm your credit score. That's because closing accounts will lower your amount of available credit, which can, in turn, lower your score. Here's why:
- Say you have $10,000 of available credit, and you have balances worth $2,500. You're using 25 percent of your available credit.
- If you then close a few cards and now only have $5,000 of available credit, that $2,500 balance will now account for 50 percent usage.
- If that percentage increases, your credit score is likely to decrease because it is viewed as a warning sign of future issues with making payments.
Rather than close the accounts, you may want to keep them open but not use them. (Of course, lenders have been closing dormant accounts more often, so the account could be closed by the lender anyway.) At a minimum, think about keeping your oldest card. Part of your credit score is based on how long you've had credit. Here's how that works:
- You don't specifically indicate how old all of your cards are, but let's say your oldest card was opened in 2000, and your next oldest card is from 2005.
- If you close the oldest, your length of credit history is shortened by five years and the average age of your accounts will shorten as well.
- As that length of history shortens, your credit score is likely to decrease because the scoring model views consumers with long credit histories as less risky than those with shorter credit histories, all other things being equal.
In many cases, borrowers are better off simply cutting up or stashing away cards and not using them. In your case, however, given how many cards you've obtained in what appears to be a fairly short amount of time -- and the fact that you're planning on getting a mortgage or a car loan in just three years as opposed to 10 to 12 -- canceling some cards doesn't seem like it should have much of an impact on your overall length of credit history. Just keep it in mind when making your decision.
Also, think twice before closing all of your store cards. Having a diverse mix of credit accounts -- credit cards, retail cards, student loans, mortgages, car loans, etc. -- only helps your score.
Lastly, don't close all seven cards at one time. Such a move could certainly impact your score and draw lenders' attention. They are likely to view it as a drastic move and an indication that you may struggle to make payments in the future.
So, if you do choose to close some accounts, consider closing your newest ones that have the lowest credit limits and carry annual fees. And don’t close them all at once.
Good luck!
See related: How to cancel a credit card the right way, The true cost of canceling a credit card, 7 times when its OK to cancel a credit card, Lower credit limits can hurt consumer credit scores, Issuers quicker to close dormant accounts
Karin's money makeover column "Get With The Plan" can be seen every Sunday in "The Star-Ledger" and "The Trenton Times." She also hosts and writes "Money 911," a multimedia series for MSN Money. Before writing became her main focus, Mueller was the executive producer of CNBC's The Money Club, where she led the team that won the network's first ever Cable ACE Award for Business and Consumer Programming. Mueller lives in New Jersey with her husband, three kids, one guinea pig and one leopard gecko. Whatever they don't eat goes into her retirement savings accounts. A comprehensive archive of her writings is available on her Web site, www.KarinPriceMueller.com.
Send your question to Karin.
Published: February 11, 2009
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