Does anyone know how an open credit card with a zero balance affects my credit rating? I have read that it is best to close these cards because having that extra credit available to you hurts your credit score. I have also read that it is better to keep these cards open because it looks better for you to have the extra credit, but not be using it. Any input?
Not the final answer by any means but another factor to consider is the age of the account. If it’s a fairly recent account (a couple of years old) and you have older accounts then closing it probably isn’t going to affect your score much one way or the other. If it’s an older account (5 years or more) then closing it could shorten your overall credit history which will have a negative effect on your score. Check out www.myfico.com which is a commercial outlet but still has some good basic information.
I doubt it matters much one way or another.
I may be out of date, it’s been several years since I’ve seen credit reports but thousands prior to that. Those credit reports showed payment histories, existing balances and payments and recent inquiries, I don’t recall ever seeing an entry showing a credit card that had never been used, but still open.
aahala, I disagree. I believe it does affect your score to have available credit, whether you use it or not. It certainly affected my score when I got my mortgage; specifically, I was listed as an authorized user on my boss’s credit card ($100K limit) and that lowered my score by 100 points from the time when I wasn’t listed.
From what I understand (I have done tons of research on this but I am not a credit analyst so YMMV), having credit cards with a zero balance DOES affect your score because it’s possible for you to charge them to the limit, and that will affect your ability to repay any other type of loan. Perhaps philster can clarify this - I believe he works for one of the credit bureaus.
I can’t comment on missbunny’s case or upon any credit scoring system.
I will state that having a few dormant credit card accounts, no balances or charges for many months, SHOULD be a sign of credit worthiness not weakness. It would imply the credit applicant had a free hand in charging but had a history of not doing so. That’s an indication of self restraint.
I hope someone can tell us specifically if and how long back such zero balance accounts will appear on one’s credit report.
I’ve seen plenty of credit-related articles telling people to close old/$0-balance accounts because it will help the score.
In almost all cases this is incorrect. Having a $0 balance card open increases the average age of your accounts, and it lowers your credit utilization ratio (best ratio is 33% and below).
Also, if you have no balance on it (and therefore no ‘normal’ monthly payments) it shouldn’t factor into your debt-to-income ratio when mortgage shopping.
I did not have this happen when we purchased our home, but when one of my employees did the Bank asked that he actually cancel his cards as he would have had too much available credit, even though he had either a 0 or minimal balance.
He complied, and promptly got another credit card through another bank once his mortgage went through.
From my experience and through discusions with mortgage lendors, open credt cards acounts does hurt. I once got a form letter with my last FICO score that explained how it was calaulated. Lines of credit (and credit cards) were part of the calculation. The surprising item was that it also includes how many credit report inquiries.
I am sure there may be different views whether credit cards with $0 balance should be counted or not. I would look at it as a potential liability just like a line of credit against your house. If the card has a $10k limit, you can charge and owe $10k.
James
I recently purchased a house and my mortgage guy had me close several old credit cards that I hadn’t used in years. I don’t even have the cards anymore as they were cut up many moons ago. Doing that and paying off a few debts that I was making payments on raised my loan amount 15%.