Quickly opening, closing accounts makes scores dip a bit
On-time payments are far more important, so stop worrying
Dear Opening Credits,
I opened two retail credit cards in November. My credit score was good. I usually check my credit on Credit Karma and saw it went down a little. So I decided to close them after my co-worker told me that having too many credit cards and not using them will only hurt me. So me as a dum-dum closed the two that I just opened because I really don't need them. Now my credit score went down even more. Will this stay on my credit for a long time or is there something I can do to fix this? -- Cindy
Stop insulting yourself! There was nothing horribly wrong with opening the store cards then canceling them not long afterward. Yes, it had an impact, but not nearly as bad as you think. Whatever points you lost can be regained. In fact, I'd call you a smarty-pants, because you must have done all the right things before this nondisaster occurred. A good credit score takes time and commitment. I'll bet you treated other accounts very well by paying them on time and avoiding overwhelming debt.
As for your scores, the one you received from Credit Karma is not the FICO, but the VantageScore. It's similar, though, as it follows the same numerical range: 300 to 850. Higher numbers are preferable, as they indicate less lending risk. And they are free as opposed to $20 for each FICO score (from myFICO.com), so you saved a few bucks -- also wise. Eventually you may want to pay for a FICO score as it is the credit scoring tool most commonly used by lenders today.
So let's talk about the impact that those retail accounts had on your credit reports, then your credit scores. I think you'll be pleased and relieved.
After you applied for the cards, a hard pull was placed on your consumer credit reports when the card issuer checked your credit before issuing you a card. These inquiries are factored into a credit score, but it won't have a significant negative affect unless you complete many applications in a short time frame. So you're fine there. A hard pull may temporarily ding your score by a few points. While the inquiries typically fall off your credit report in two years, their slight damage will be erased long before then if you continue to pay your bills on time.
When the credit lines were granted and you began to use them, the issuer started to send information to the credit reporting agencies. It included when the accounts were opened, the amount you were allowed to borrow and any balance you carried over from month to month.
If you had a lot of debt when you opened the account, the new accounts would have caused your credit scores to rise because your utilization ratio would have opened up. This ratio calculates the amount you owe across all your credit cards in relation to the amount you can borrow. There's an old myth in the credit scoring world that says the magic dividing line is 30 percent -- that if you keep your balances below that point, your scores are protected. The truth is that the lower your utilization, the better.
So did canceling the accounts hurt you? As you can see, yes, a little. Your scores declined because the amount you were able to borrow decreased, possibly leaving you with too much debt. However, the dip is only temporary and you can easily bounce back by reducing any balances that you have today. A pattern of continued timely payments will also push the digits back up.
As for too many versus too few accounts, there is no magic number for scoring purposes. You just want to show that you have and can handle different types of credit over an extended period of time. Evidence that you had the accounts and used them correctly, even though it was just for a few months, will show up on your credit reports for a total of 10 years.
Just keep doing what you've been doing: charging then repaying responsibly. So many people complicate the matter, but it really is as simple as paying on time and staying out of debt. Do so and you're proving to lenders that you're a trustworthy customer.There is one thing I'd like you to do differently, however. Stop following random folks' advice. Even if they're well-meaning, they could be wrong. Instead, go straight to the experts.
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Published: February 18, 2015
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