I have the opportunity to pay off several thousand dollars of credit-card debt spread over 5 cards. This will leave me with lots of open credit that I cannot use. But I’ve heard that closing credit cards hurts your credit score. So what’s the best way to manage these cards so that I can keep my credit score optimal? Do I have to keep a small balance on each of them (and pay the balance each month, natch)? Is there a way to merge or consolidate them? I’d prefer to get rid of at least two of them if there’s any way to do it without hurting my score.
One thing to also remember is as soon as you pay off your credit cards, the credit card issuing bank is likely to reduce your credit limit. All of mine did that. I would just pay them off and keep the cards open. Use each one at least once a year and pay that bill off in full at the end of the month.
Really? I’m a credit deadbeat (i.e. I pay all my balances off in full every month), and they keep throwing credit limit increases at me. I’m not sure what algorithm they’re using to give me these.
The algorithms used to calculate credit scores are proprietary and differ across the various credit agencies. Hence, as with anything that’s basically ill-defined and highly variable, you’ll find all sorts of conflicting “correct” advice offered on the internet.
My experience has been that if you’re in a position to close credit cards (especially if you’re in a position to close all of them), your credit score will take care of itself, and little quibbles like whether or not you actually DO close them won’t matter much.
That said, every credit card you have open carries some risk: identity theft is the obvious one, but yearly fees and various other tricks by the credit companies themselves probably cost most people more, especially now while they’re trying to get in all the fee increases they can before the new regulations hit. I’d keep one or two open depending on credit limit, and close the rest so I don’t forget about them.
Take a look at your cards critically. Keep the oldest. Keep the one with the best deals (points)- and also the one with the lowest interest (and high limit), and keep that one in a safe deposit box. I also keep one with a very low limit (only $1500) hidden in my luggage, just in case. Yes, there could be a tiny and temporary hit on your FICO *score *(not your Credit Report) for closing some accounts. Unless you are planning to buy or refi a house very soon, just do it and get it over with. It’s safer.
Use the one with the best deals and pay if off in full religiously every month. That’s what I do, like BorgHunter.
BorgHunter: on that, afaik, CC companies don’t really call dudes who charge a lot and pay it all off “deadbeats”, that seems to be a not cited canard started by a enemy of the CC companies. Note that is bascily what the std AMEX account does, and they are happy to do business with you. My CC company seems to be quite happy, giving me Bonus Points, and whatnot. That said, I charge about $2000 a month, and am early with my payment in full.
I don’t know where this meme got started, either. The credit card companies make money on every transaction. They don’t care if you pay off your card or not, especially on an individual basis. Use the card a lot, they’re happy, period.
Also, if you have a super high limit, you might one day snap and buy a boat, and pay interest.
Okay, so if I’m not planning to apply for another mortgage for at least a year, closing 2 of these cards out now won’t hurt me?
And for that matter, how much will having paid off my mortgage help? I’ve had a mortgage since 2006 that I’ve paid on time each month. Assuming I sell the house next summer and pay off the balance, that’s gotta be good for my credit, right? One mortgage successfully completed…
One last question. I’d like to pay off my car loan as well, but my dad suggested that I should keep it so I have something besides credit cards on my credit report. But if I have the mortgage and 15 years of (almost) spotless credit history, surely that’s enough to qualify me for another mortgage down the line?
FWIW, the PBS show “Frontline” made the claim in 2004. I think a lot of peoplke picked it up from there:
Nope.
Hard to say, but being a homeowner with solid equity is golden.
Sure, go ahead, pay it off, I did. Do call and ask first, there could be penalties.
None of mine did that. In fact, I have a card from Chase that I haven’t used in several years, and it’s still a no-fee card with the same limit. Maybe they hope I’ll run up the balance.
This info is based on:
[ul]
[li]my following my own credit score very closely and reading the score explanations provided (I’ve been pulling my score almost every day for over 2 years and infequently for a few years prior).[/li][li]my reading various articles on the subject[/li][/ul]
The most important component of credit score is payment history. So you should always focus on paying on time. Of course, if you’ve made late payment sin the past - you usually cannot undo that, but here are some things worth a shot:
[ul]
[li]If you realize you’re a couple days late - call the creditor, tell them it’s an oversight, offer to make the payment and ask them to please not report the late payment to the reporting agencies[/li][li]If you have a mark on your report and an outstanding balance, call the creditor and ask if they would be willing to remove the mark in return for your paying off the balance (this is more likely to work with collection agencies than normal creditors)[/li][li]If you have old marks on your report, you can dispute them - it’s possible that the creditor has not performed their record keeping obligations properly and the mark may have to be removed[/li][/ul]
Honestly, alot of the time, these things won’t work - so focus on not needing to try to them. But even with a low chance of success, they’re usually worth a shot since you don’t have anything to lose. If you do have a mark for late payment, it will stay on your report for 7 years after the debt was initially incurred (meaning that if a collection agency acquires your 2005 debt in 2008, the mark still has to come off in 2012, not 2015).
The impact of the ‘mark’ will fade over time. It will crush your score pretty good in the first month, but over time your score will creep up. A few years after, it doesn’t have nearly the effect, but the formulas are not publicly known.
The next most important factor is credit utilization. This focuses on revolving debt, not installment debt (so credit cards, not mortages). It is basically looking at debt / limits. This is one of the reasons why people are told not to cancel old cards. By reducing your credit limit, you are raising your credit utlilization. The higher your credit utilization is, the lower your score will be. One thing to keep in mind is that not just overall limits are looked at. The utlilization of individual cards is also taken into account - if you bring a card up close to its limit, you will see a ding in your credit score, if you go over the limit, you will see another one. Of course, your overall utilization is more important. But **do not ** max out one card when there’s room another because of the interest rate or the reward points or whatever. Keep the debt spread out at least a little rather than running up any individual account (if you’re not near limits, then obviously you should use the lowest interest card you have - unless you plan to immediately pay it off, in which case you should use the card with the best rewards, preferably cash back).
The next item is length of credit history. The longer your credit history, the better your score. This means that anyone without credit, should immediately go get a credit card, regardless of whether you need it or not. There are two items looked at here - average credit length and oldest account. So, never cancel your oldest card. My oldest card was from Capital One and it had terrible terms . I opened a new card with them and then called them up and had them merge the new account into the old one, replacing the old terms with the new terms but keeping the previous credit card number and most importantly, the account age. If the old account had an annual fee, it may be tough to replace the terms with terms that don’t have one - companies hate giving those up. OK, so if you are going to cancel cards - get rid of the newer ones, all other things being equal. And remember that if you open a new account, it will lower your average age.
Next item is credit inquiries. Whenever you apply for credit, you’ll probabloy have a ‘hard pull’ reported. They stay on your report for 2 years. The more you have, the more yuor score is lowered - but their impact is small compared to late payments, high credit utilization, etc. Ofte, if you apply to multiple lenders for a home or car loan, you will see only 1 mark on your report, rather than several. Pulling your own credit report will never affect your credit score.
The last item you typically see described is “types of credit.” Your score reflects the make up of your credit - the more of yuor debt that is in the good categories, the btter your score will be. Here is how the categories are ranked, from best to worst:
[ol]
[li]Mortage[/li][li]Installment Loan[/li][li]Credit Card[/li][li]Retail Store Card[/li][/ol]
Note that you have your score lowered for having too many installment loans (this is currently on my score explanation from Experian). It does appear that just having a mortage will raise your score by a signifigant amount (using the score estimator toll on Experian’s credit monitor website, it is indicated that my score would increase by 34 points if I had a mortgage. I actually just closed on a place, but the mortgage hasn’t made it onto my credit report yet - so we’ll see if this is true in a few weeks I suppose.
Besides these commly discessed items, there are several other potential factors:
Public Records - things like bankruptcies and court judgments can be very bad - I have no real advice here.
My score report seems to indicate that having two major credit cards is positively contributing to my score.
In the past, I have seen that my credit score was lowered for having low average credit limits on my accounts.
So, to the OP:
I would be cautious about closing credit card accounts - unless they have annual fees, I would not close them. I would not close my oldest card under (almost) any circumstances. I would be sure to keep at least two. If I were to close accounts, I would choose based on these factors - listed in order of most likely to make me want to close:
[ul]
[li]Retail Card[/li][li]High Annual Fees[/li][li]Newer Card[/li][li]High Iterest Rates[/li][/ul]
Keeping cards and not using them requires some willpower, but having access to them in an emergency is a good thing too.
As far as paying off the mortgage, I would consider carrying it until the next mortgage application. You can take that money and put it aside for down payment. Often times, you can get a better rate with a higher down payment (and I’m not talking about buying discount points). More importantly, it could keep you out of PMI territory if you can get over 20% down.
As far as the car loan - that probably won’t matter a whole lot, but I think the money may be best served on the down payment or on avoiding using other credit cards.
It’s important to keep in mind that you’re not just trying to qualify for a mortgage, you’re trying to get the best possible rate - every little bit of credit score will help on that front (OK, 1 point won’t make a difference, but you get the point).
As to the question of having credit cards that you don’t use:
[ul]
[li]The cc companies still make money[/li][li]that said, they lower limits and cancel cards for all kinds of dumb reasons, so they may do it for this too sometimes[/li][li]Using them a little and paying off the balance may or may not make the CC companies happy - I have no idea[/li][li]Using them a little and paying them will still probably result in your showing a balance on the credit report - but if it’s small it shouldn’t matter[/li][li]There is no credit report penalty for not using the card except I have heard that if you don’t use a card, the company may stop reporting to the agencies, and the card could disappear from your report, raising your utilization and lowering your score - I have never seen this happen and have cards that I’ve haven’t used in ages[/li][/ul]
So, if you want to use them a little to prevent the CC companies from arbitrarily messing with you, feel free - it probably won’t hurt anything.
Hope this helps.
For what it’s worth, I’m refinancing my house right now. My lender sent me a letter saying my Equifax credit score is 804. It says my credit score isn’t the highest possible score of 850 because:
Time since most recent account opening is too short (possibly a reactivation of a store card last month or the car loan I took out in February?)
No recent revolving balances (I pay off all credit cards in full every month)
I cancelled my oldest card a couple of years ago. My second oldest card was 10 years old so I don’t think it hurt me. I think a score over 800 probably qualifies me for the best interest rates pretty much anywhere so I’d rather keep paying off my balances every month. Actually, I use my credit card more like a debit card and, since it’s issued by the same bank where I have my checking account, I pay the charges as soon as they show up. I have a ton of store cards and a few VISA cards I haven’t used in years and haven’t bothered to officially cancel.
I know someone who went from bankruptcy back to a credit score of 800+ over the course of several years. So yes, it’s very bad at first, but by carefully rebuilding credit (essentially starting over) and making payments on time you can rebuild your good credit even after a bankruptcy. It takes 7-10 years.
While rebuilding your credit, your history BEFORE the bankruptcy can have an impact with some lenders. If they see a decade of responsible conduct (on time payments) with a sudden >BOOM< - BANKRUPTCY then responsible behavior again they are more inclined to risk their money with you than if they see nothing but bad behavior before and after. (In the case I mention, it was a sudden, severe illness that lead to the bankruptcy, not fiscal mismanagement)
Clearly, you want to AVOID bankruptcy, but it’s not the end of the world. Neither are current credit problems.
I closed my oldest card because they kept selling my info to other people even after I opted out of that so I was continually deluged with offers for crap I didn’t want; they kept arbitrarily changing my credit limits; they kept f’ing up with the billing; and the last straw - they started mailing my bills and a new card to the wrong address. Fortunately, my identity was not stolen but that was the last straw - I dumped them. So I wouldn’t say never close your oldest card. If there is something amiss do so. The “hit” I took went away in about 3 months, if I recall. It’s pretty minor, especially if you have another card that’s years old and a good credit record. Don’t do it if you’re planning to, say, buy a house in the next year or so but otherwise it’s a potential option.
I’d say the biggest thing is paying on time. And not just the plastic but the rent (if you rent) and utilities, too.
Good info here.
Yes, definitely good to remember that you can dig out of any hole over time, so the most important thing to do is start.
There are some things that would make you decide to close your oldest card - but they are pretty rare.
This is a big point. If your second oldest card is only a few months more recent than your oldest, then don’t worry about it - just don’t close both. And how old your credit is in general matters, too. If you have one account that’s 18 years old and your second oldest is 14 years - then you’re still probably fine. But if your oldest is 5 years and the second oldest is 1 year - that’s a much different story. One 4 year change isn’t necessarily equal to another 4 year change. I would say the “don’t close your oldest card” maxim has much more relevancy to younger people, or people who didn’t start developing credit until they were a little older.
Yes - big time. Although the chances of getting a mark on your credit report for a utility bill is markedly less than for a credit card bill. As long as you aren’t put into collections, you are very unlikely to be reported to a credit agency for rent or electricity or whatever. So if one thing has to be late - make it a utility rather than a credit card. You shouldn’t have to be late on anything, but it’s the right decision in that circumstance.
804 is great. Typically you don’t get any better terms for over 780-800ish. (That is to say 830 doesn’t get a better deal than 810 - they both get the best deal…)
This sounds more like something that the bank would say (regarding how they evaluate credit worthiness, which is more than just looking at the score), rather than a credit reporting agency. BUt if it was the agency, then that is interesting.
I’ve never heard this before, and it seems strange that there wouldn’t be any revolving balances at all. They must always report you balance right after you pay and never have reported your balance after you bought something but before you paid it. But if you’re at 804, it doesn’t matter much.
Debt and the interest accrued on it are, in general, bad for you. Particularly credit card and car loan/toy debt. Pay off the car loan and enjoy the feeling of freedom. We had a lot of debt 18 years ago and paid it all off about 15 years ago, including credit cards. We had no mortgage. Then, about 10 years ago, we applied for a mortgage loan. Zero problems. Paid off the mortgage about 3 years ago and still had no other debt. Sold the house and bought this one last year. Zero problems. So don’t sweat it.
Thanks, everyone. I think after paying everything off, I’ll close two of the cards, both of which are fairly recent, and keep the oldest card, the one with the highest limit, and the Costco Amex. (Gotta love those rebate checks.) It seems as though by the time we would be applying for another mortgage — which is at least a year out — our score would be back in good shape.
I did look at my credit report and found only one late payment listed that I already knew about, which was on a now-closed department store account in 2005. But the rest is clean, and there are no accounts there I can’t account for. So to speak.
A overall excellent and well written post!
A few quibbles:
Afaik, “a few days late” is not reported, it must be 30days + late.
Also, although the number is unknown, it seems to take a number of inquiries to reduce the score, 2,3,4? I think they also reduce the score for only a short time.
Thanks.
The “past 30” thing that you see can be deceptive. Your credit cards already give you about 30 days to pay after you get the item, so as soon as you’re late on your bill, you’re “past 30.”
Note that it isn’t 30 days “late” it’s just “past 30.” If you’ve ever worked in A/R or A/P this would immediately click since the most common payment term is “Net 30” - which means you have 30 days to pay, so if you’re “past 30,” you’re late.
The hard inquiry thing can be hard to predict - they do stay for 24 months, but I can’t say for sure if the impact goes down over time. Having 0 is obviously good, Experian seems to categorize inquiries into buckets of 1-2; 3-4; 5-6; and 7 or more. The impact of these is relatively minor compared to the other factors, but if you have sketchy credit to begin with, you should be careful about going hunting…