Closing 50 cards without damaging credit score
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Dear Speaking of Credit,
I am helping an elderly friend whose husband just passed on. They have 60 credit cards with $0 balances and no yearly charges. To simplify her life, she wants to close 50 down. Her credit score is over 800. How can she do this with the least negative credit impact? All at once or some at a time? Don't close them all? Write to each credit card company or call? -- Gina
Great idea to close those cards! Not only will your elderly friend be simplifying her life by closing down the majority of the 60 credit cards she's holding, but she'll also be reducing the chance of identity and credit card theft. And she can do this without hurting that excellent 800+ score -- if she does it right.
As I see it, there are three major factors to consider when deciding which cards to close, and when:
- Credit limit: This impacts both the credit utilization scoring calculations (card balance/limit ratio) and the capacity to make large purchases should the need arise unexpectedly.
- Age of the account: Impacts the length of credit history contribution to her credit score for as long as an account remains on her credit report -- typically about 10 years after the closed date.
- Interest rate: Since she's not carrying any balances, the interest rates don't have any direct impact on her debt or credit score. Interest rates are not reported to the credit bureaus, don't appear on credit reports and are not included in any credit scoring calculations. However, rates on the cards remaining open could be important if she ever finds herself unable to pay a credit card bill in full.
Other, less-critical factors might include weighing which card companies have provided the best service in the past and keeping a variety of cards open, such as at least one each from Visa, MasterCard, American Express and Discover, to provide an alternate method of payment in case one of the card networks is unable to approve a purchase.
Knowing how specific credit reporting information impacts credit scores is a good place to start the process of closing cards. But how do you use that information to decide exactly which ones to close, and when? From your letter I'm going to conclude that maintaining an 800+ score is most important to your friend, which will have us focusing on the first two of the three factors listed above -- credit limits and account age -- as they will have the most impact on her scores over time.
You may not think the size of the credit limits would matter to the score, since your friend doesn't carry credit card balances from month to month. However, while paying balances in full before incurring a finance charge is always good for a credit score, not to mention the pocketbook, you can still damage your score by charging close to the limit and triggering a high utilization percentage prior to paying the bill off the following month. This occurs due to the way in which credit card balances are reported to the credit bureaus: The balance appearing on a credit report is the latest statement balance -- regardless of whether the balance is later paid in full. If this reported balance is higher than the one reported the prior month, credit utilization can rise and the score can drop, at least temporarily, until the balance is recorded by the bureau as being paid off.
To give you an example of how a higher balance on one card one month can raise the utilization percentage from the prior month -- and hurt the score -- let's say a card has a credit limit of $1,000 and the monthly charges typically add up to $100 before being paid off the following month. The typical monthly utilization for that card would be 10 percent ($100/$1,000), the kind of low percentage the score likes to see. Then one month we add a surprise major purchase of $800 to the usual $100. The utilization for that card for the month in which that $800 balance is added would jump to 90 percent ($100+$800/$1000), and would most likely lower the score. Again, this will take place despite the fact that the balance is being paid in full with no finance charge.
If, on the other hand, we have a limit of $10,000 on that card instead of only $1,000, and the same purchases occur, the normal utilization rate would be 1 percent ($100/$10,000), and would rise to only 9 percent ($100+$800/$10,000) with this major purchase -- an increase not likely to impact the score. The very real possibility of such a situation makes it important to have cards left open that have enough purchasing capacity to handle that unexpected plumbing, medical or other large bill.
The other credit score-related concern when deciding which cards to leave open and which to close is the age of the account. While account age doesn't have quite the impact of credit utilization (almost 30 percent of the score), longer-held cards contribute positively to a consumer's length of credit history (15 percent of the score). So hanging on to the oldest cards for as long as possible also helps maintain a high score.
You also asked if it's better to close all 50 of the cards at once or over an extended period of time. I'm going to suggest closing them over as long a period of time as possible, such as a few cards per month, or a bunch of cards every three to six months, until reaching that goal of 10 accounts left open. This way all of the closed accounts won't fall off her credit report at once which could cause a major jolt to her score a few years from now.
To protect that high score, I recommend you start by closing the accounts that have a combination of the lowest credit limits and shortest history, a few at a time. Department store cards are a great place to begin, since their limits tend to be low and don't contribute as positively to credit utilization as bank credit cards. Then continue closing accounts in this way until left with 10 cards having some of the highest limits and oldest open dates.
Finally, once a strategy is in place it will also be important to make sure that:
- All requests to close accounts are made in writing, not over the phone, to the credit card companies.
- The cards being kept open are used occasionally to prevent them from being closed due to inactivity.
- Your friend's credit reports are reviewed periodically to make sure the closed accounts are being reported as closed, and the open cards reported as open.
See related: Too many cards increases liabilities
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