Protect credit scores when canceling a credit card
To Her Credit
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for CreditCards.com, and also writes regularly for MSN Money, Interest.com and Bankrate.com, and has guested on Martha Stewart Radio and other programs. See her website SallyHerigstad.com
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Dear To Her Credit,
I want to cancel one of my credit cards but before you
immediately shoot down my proposal, please hear me out.
I understand that my decreased debt-to-credit ratio will
affect my FICO score if I cancel the card, so I increased my credit limit on
another credit card to compensate for this. Before I cancel one of my credit
cards, I want to ensure that my score won't suffer adversely within the span of
a few days. What are your suggestions? -- Jermaine
Far be it for me to shoot down your proposal of getting rid
of excess credit cards, especially if you're doing it as part of a plan to
reduce your consumer debt! In fact, I wish people would focus less on every
little point in their credit score and more on improving their total financial
picture. If you take care of your finances, for the most part your credit score
takes care of itself!
Credit scores are an inexact science. Your score can vary
from day to day and from one model to the next. In fact, contrary to popular
belief, you don't have just one credit score. There are dozens of scoring
models out there, and every scoring model is going to come up with a slightly
different score. The different models don't even have exactly the same ranges,
but the most widely used credit score -- FICO -- ranges from 300 to 850.
You say you don't want your score to suffer within a few
days. Are you applying for a mortgage or more credit? That's the only reason a
dip of a few points should concern you. A credit score is not a grade. Most of
us can go for years without our credit score affecting us in any way. When we
need a good score, for example when we buy that dream home, it becomes very,
very important. But your score next month and the month after probably makes no
Your exact credit score matters most when it is close to
another range. For example, if you have a score of 730, some mortgage brokers
will give you their best rates. For most mortgage brokers, however, once your
score is over 740, it's not going to make much difference if it's 780 or 790 --
you're already getting the best interest rates available. A FICO score of 800
is a beautiful number, but aside from giving you bragging rights, it won't change
If you are applying for a mortgage (and with interest rates
so low, this is a great time to do that), hold off on closing the credit card
until after your loan closes. As you probably know, closing an account doesn't
just affect your debt-to-credit-limit ratio . It can also adversely affect your credit
score if the card you close is your oldest card, because length of credit
history is seen as a good thing. Bear that in mind as you decide which card to
close. The new credit card eventually becomes old too, however, so as long as
you're not card-hopping, it eventually evens out.
The best way to permanently improve both your finances and
your credit score is to get that debt-to-credit ratio to zero. With one fewer
card, it's time to make a plan to pay off the others.
See related: How your FICO score is calculated: Length of credit history
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Published: May 25, 2012