Will closing accounts hurt credit rating?

baseballmomoftwoFebruary 2, 2006

We paid off all our debt (except for our mortgage), and we have always had a high credit rating. We have 4 ccards that have high limits. I would like to close at least two of them out, because I really don't need that much open credit and don't plan on using it. Will that lower my credit rating? Thanks for your advice!

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lizql

I've done that. Never hurt mine. Paying off the mortgage actualy lowered my credit score. Didn't make sense to me. Less going out each month. I guess creditors think everyone should be in house debt.

    Bookmark   February 2, 2006 at 3:39PM
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baseballmomoftwo

Thanks, that is what I had heard about getting rid of debt - it can hurt your credit score. I heard a story about an elderly man who couldn't get a good insurance rate because he didn't have a good credit score (because he had no debt). My dad couldn't get a verizon account at first because of the same thing.

Yeah, my mortgage is next!!

Thanks!

    Bookmark   February 2, 2006 at 3:52PM
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celticmoon

I read that one significant factor in the formula for determining your credit score is the ratio of your credit card balance total(or debt) to the total limit on all the cards.

If that is true, then closing high limit cards would lower your score because the ratio would change. The new ratio would suggest (however wrongly) that you "use" a greater amount of your available credit.

Anybody know for sure how the scoring works? I just assume it is an illogical formula that makes some people look riskier than they are.

    Bookmark   February 4, 2006 at 3:15PM
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chuckr30

Baseballmom,
I heard that too about the guy with bad credit because he had no credit card accounts. But I can't remember if it was the Clark Howard show or Dave Ramsey. I think it was Clark Howard as I heard it in the morning.

    Bookmark   February 6, 2006 at 1:19PM
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kudzu9

The problem with credit rating formulas is that they produce results that are fairly reliable indicators for many people, but they are applied to all people and that can lead to illogical results in many cases as the examples above point out. The effect of closing accounts may affect your score by a few points, but it's not going to radically alter your credit picture. The best thing you can do is keep your credit accounts current, and paid down or paid off. I had a number of credit card accounts that I didn't use anymore, and I talked to one of the credit agencies (Experian) about the effect of closing them. I was told (at least in my particular case) that it wouldn't help my score, but it wouldn't hurt it either. I closed them.

    Bookmark   February 6, 2006 at 2:20PM
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joyfulguy

Better make darn sure that the credit cards that you use to pay bills online have *really* *low* credit limits!!

If they are high now - contact the card company to have them reduced, on the cards that you use for online payments.

ole joyful

    Bookmark   February 6, 2006 at 4:22PM
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celticmoon

HMMM.. I just pulled our credit reports ( FICO > 800) and noticed a Visa account I thought I had closed to be still open with a credit limit of $50,000. I closed the account because we have no need for that kind of credit, and the vulnerability of that credit line out there didn't sit right.

I'll give it a bit and see what that does to the FICO. I expect a significant drop - no worries, as we don't anticipate any borrowing.

    Bookmark   February 18, 2006 at 1:07AM
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sandiego2

Your credit score will be lowered when you close that account. They compute your outstanding balance/available balance. As you have more credit available that is unused, your score goes up.

You have a higher score for cards you've held longer. Thus, switching balances and closing the old card LOWERS your score.

Creditors look at your ability and willingness to pay. Thus, having unused credit, keeping the same card for a long time, and making timely payments are the best indicators for a customer's likelihood of making future timely payments.

I sold my house and paid off the mortgage and all CCs, and I realize that I have to keep them open and use one or two at least one a month, so I can keep my high FICO score to buy another house (after the housing bubble collapse).

    Bookmark   February 25, 2006 at 12:26PM
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sparksals

Don't close the cards. Just put away the ones you don't need anymore. LIke others said, closing accounts will reduce your debt ratio and lower your credit score.

    Bookmark   February 28, 2006 at 6:25AM
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squeakmommy

I agree with the last two posters - don't close them. Just don't use them. One of the biggest factors affecting your credit score is the amount of used credit to the amount of available credit. If you have 4 CCs with $1000 limits and a zero balance, you have $4000 available credit. I have two small "emergency" credit cards that I recently paid off completely, and my credit rating jumped 100 points!

    Bookmark   April 14, 2006 at 4:08PM
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brian123

I understand about closing accounts and debt to available credit ratio. My question is about how many consecutive months without any activity on a credit card does the account close? A family member had his Sears card closed by Sears due to inactivity of six consecutive months AND his Capital One card for the same reason. Anyone know the scoop on this one? How do you keep those high limit cards with a zero balance without having them closed out? Does a ten dollar purchase every six months qualify as active or is there a dollar amount considered to be active (100, 500,1000)?

    Bookmark   May 15, 2006 at 10:34PM
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xine

I've had several credit cards with no usage that are still open after several years, including a Chase, Citibank, and Capital One visa or mc. They all send me loads of "offers" to get me to use their cards, but we use our AMEX for everything and pay it each month and bank the Delta SkyMiles.

When DH and I got married he closed one of his cc accounts and his scored dropped from 787 to 740. It took a few months to get it back up... We refinanced one house just a few months after that and saw his score then. About 6 months after THAT we bought another house and his score had risen back up. The 740 number was the lower cutoff to not having to provide documentation on our loans, so it would have been a PITA if it had fallen further.

Our scores are now over 800 (depending on the day and when AMEX has last reported and when we paid our bill) and that's with 2 mortgages, 2 HELOCs, and 1 car loan.

The MyFICO webpage has explanations of how different situations can effect your scores.

    Bookmark   June 8, 2006 at 11:02AM
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mariend

When you close any accounts, I request them put, closed by customer and our score is quite high.

    Bookmark   June 12, 2006 at 6:03PM
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cathie54

they keep changing their tune...(LONG - sorry!)

I agree with most of the latter posts - do NOT close out you CC's, it will bring down your FICO (or so I've heard/read last couple-3 yrs)

Some people will say close out your acct's when paid off. (I'm sure this is meant for financially "out-of-control" spending)

The thing is (from what I've read recently) is that the more "available" credit you have (vs debt), higher your credit score. AND, the older the "available" credit, the better.

I really don't know how to explain this better right now, but let's say you have TOTAL DEBT of $200,000, (mortgage pymt is all you owe), and you have total "available" credit of $1,000,000.

(Anyone feel free to correct me as needed - I'm tired!)

SO, you now have a 20% debt/ratio.

Any CC you close out = LESS "available" credit.

LESS available credit = HIGHER debt/ratio.

For example - let's say you have a CC with $200,000 Credit line available, and you close it out. NOW you have a 25% debt/ratio. ($1,000,000-$200,000=$800,000)

You have ONLY a mortgage balance of $200,000. But NOW you only have $800,000 "available credit".

This will bring your FICO score DOWN.

I know it doesn't seem right nor "fair". But, that's how it works (as far as I know TODAY).

Wish I had known about this a few short years back. I applied for a CC to do balance trf. They wanted to give me like $3000. I only "needed" like $1800. "THEY" decided to give me $2300!
PLUS - some other CC's automatically RAISED my limit. I would call them and have them DROP my limit back down!

Little did I know that I "maybe" hurt myself doing these things!

Unless you are POSITIVE you no longer need a high FICO - (or, have medical or other situations that want you to MAX-OUT), I say KEEP them.

Just use them once every month or two or three. I've used mine at grocery store for as little as $6 or $7.00 - just to keep active - and pay off when bill arrives.

(And about that Sear's Card - what a joke! I had one from the 70's with a $260.00 cr limit - (which was dumb - you'd think after about 30 years they'd raise the cr limit!). I got a notice one day that they were "replacing it with a "Sear's M/C". OK... I got the thing and a $15,000 credit line! I laughed about it - NO WAY! TOO much credit line. A year later (b'cuz I never USED the card) - out of the blue I get notice my CC has been cancelled due to "non-activity"! No warning...)
FINE! Whatever!

ANYWAY - I believe if your total MAXIMUM debt/ratio is 20% or LOWER, you are in really GREAT shape (as long as you have no recent late pays, etc.).

I have recently heard the mortgage lenders are laxing off somewhat on loans (used to be about 30% ttl debt/ratio?) - but don't know for sure, as I have no reason to contact them for anything!

    Bookmark   June 14, 2006 at 9:23AM
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