Did I just improve my credit by cancelling cards?

Factual Questions
1

I am aware that in determining my eligibility for a loan, for instance, financial institutions look at how much I could potentially borrow (based on available balances on cards, lines of credit, etc.) after they lend me money.

I am also under the understanding that they look at what percent of total available credit I have outstanding; viz, how much have I used up out of what I was given.

I had 3 cards, one of which carries nearly a full balance. The other two had no balance so I cancelled them. Did I just improve my credit rating or make it worse?

Oh, I’m not explaining this well.

Suppose that each card had a credit limit of $1000. Is it better to owe $1000 out of a potential limit of $3000 or is it better to owe $1000 out of $1000?

2

I would think that having one maxed-out card is worse than having one maxed-out card and two empty ones, but i’m no expert.

3

Probably didn’t do anything to your credit rating. I see credit reports everyday at work (I pull credit checks on people for cell phones). Generally, credit companies will probably look at several things including payment history (no R2, R3 or R9s) and how long you’ve had credit. Your credit utilization should be 75% or less so since you’re reduce the amount of credit you have, you might have lowered your beacon score slightly.

As long as you’ve never forgotten any payments to your credit card and otherwise don’t have any bad histories with your creditors, you should be fine. I was worry when I was applying for a car loan because my FICO score was in the mid 600’s then (below average score) but I still got it. I then learned later that getting a car loan was very easy (the requirements are pretty low).

Also, remember every credit “hit” reduces your score. If you’re looking for a loan don’t go to every bank and have dozens of hits on your file as a result. It will put a good dent in your FICO score.

4

Um, what if you had a history of not paying things back, but now all of your debts are cleared, will your FICO score be quite good or quite bad?

5

FICO scores are slightly less complicated than nuclear physics.
I was informed that any open accounts can be considered a negative, so you probably helped a little by closing those 2. Companies look at how much you might owe when extending credit. In other words, having several open cards with $1000 credit can be considered a negative, because you could run those up with little effort.
Speaker it depends how long ago those were, how many, how often, and how late were they. Less than 30 days late is not too bad, unless there’s a lot of them. Over 30 is bad, over 60 is worse, and any collection proceedings are a death knell.

Of course, it also depends on your income now and how much credit you have now too.

Here is a brief explanation of what affects FICO scores.

It’s also a good idea to check your credit report once a year, to make sure there are no errors or anything. The three major agencies are:
Equifax
Experian
TransUnion

Get a report from each and see if they agree and if there are any problems. They are pretty decent about working with you to fix them.

Good luck!

6

Ok, I used to work for Equifax, so here’s the deal.

  • Closing an unused credit line will usually lower your credit score if you carry balances on other accounts. You see, your FICO score drops as your used/available credit ratio rises.

In other words, if you had four cards, each with a $5,000 limit, and one of them was maxed out, you’d be using 25% of your available credit (which is considered good). However, if you close two of the unused cards, your usage suddenly climbs to 50%, which will hurt your FICO score, because it looks like you’re living off of your cards.

-Having a maxed out card looks bad too. Ideally, using the above scenario, you would want to have that $5,000 balance spread out across the four cards. Having it all on one card will lower the FICO score a little.

-Having too many cards can be bad too. It’s ideal to have 3-5 cards, and not have more than 25% of the total outstanding at any time. If you have $100,000 in open credit lines, most lenders will be afraid to let you have their card/loan. They don’t want to be a victim when you max them all out and file bankruptcy.

-Never get a gasoline credit card. It lowers your auto insurance credit score (yes, you have separate auto, home insurance scores based on several factors). They figure that people who have gas cards drive more than people who don’t have gas cards. The more time driving = more chances to wreck.

-It’s important to have 1-2 department/retail (non Visa/MC) cards. Having these will slightly improve your score.

  • Your FICO score is not affected AT ALL by your income, time at job, etc. They are not factored into the score. Your score is based mostly on payment history, available/used credit, age of accounts, and number of credit inquiries.

-As negative items get older, they are a lot less important. If you have a perfect payment history, and then miss one payment on a Visa card, your FICO score could drop 60 points overnight. As time passes, and no more late payments are reported, the score will rise signifigantly, and the 30 day late payment won’t matter at all after 24 months.

7

How is your FICO score affected if you have a shitload of cash, with no need to ever borrow money like EVAH?

Are you perceived as being a shithouse financial specimen under those circumstances?

Coz I gotta tell you - therein lies the irony. If you never borrow money because you never ever need to, the logic argues that your poor credit history makes you a high risk.

10 years or so ago, I had a loan manager try to argue that to me once. I had $32,000 sitting in a bank account, and I owned a condiminium outright. I had a great source of income backed up with Tax Returns etc. I was thinking of taking a loan on a car instead of spending the cash. But I had zero credit cards to my name and had never borrowed money before. It totally did the guys head in. He genuinely expected me to put all the cash in a fixed term deposit which was non-drawable for the length of the loan.

I smiled… I looked at him and said - “Nope, not gonna happen buddy. That’s why YOU’RE the Bank Johnny, and I am the one with the cash…”

8

If you never borrow money, don’t use credit cards, etc, your credit score will be low. Your credit score has nothing to do with how much money you have in the bank, or how much real estate you own. The FICO scorring model doesn’t consider things like that at all.

Credit can be like a prison. Once they’ve got you, it’s hard to get out.

Unfortunately, most Americans consider credit to be a way of life. The endless parade of 0% financing, no payments for 18 months, etc, really draws them into the prison. Most of them never do the math to realize that the financing offers are a total sham.

Heck, I have a friend who just bought a Dell computer using their payment plan. The interest rate is 28%. Let me say that again: twenty-eight percent! If he wasn’t such a slacker, I would have lent him the money at 27%…

9

I too have a question. Suppose I have a credit card with a $300 limit and I’m offered another credit card with a $500 limit. Wouldn’t it be in my best interest, both short-term and in terms of my rating, to close the account I have and use the new credit card instead?

10

No, because the age of the account is also a factor. The longer you have an account open, the more favorably it’ s seen. The better thing to do (if you needed the higher limit) would be to talk to the company that issued the $300 limit card and ask them to raise the limit.

11

Ah thanks. I had no idea you could ask for something like that. I don’t need the higher limit, but the point would be to decrease my used/available credit ratio, as gottago says. Is it possible to ask for a lower APR, if another company makes an offer that’s lower?

12

So, let’s say I have three cards:
One I use for day to day things, usually amounting to about $1,000 per month, which I pay off every month.

Another I only use when the first isn’t accepted at a place (say, Discover/MC/AmX, whatever), so it might have $50 a month, but usually nothing.

The third is one of those 0% for 12 months deals that I’ve got my LASIK balance on and am paying $100 a month, figuring a $2,800 ballon payment at the end.

I paid off my 5-year auto loan in 3.5 years and bought another for cash last summer.

gottago said cash doesn’t matter, but I’ve got a 5-digit balance in my savings and a steady-mid 4-digit checking balance and have for many years.

I’m looking to buy a house in the near future- I should be okay, right?

13

Oh, and if it matters, the three cards have limits of between $11k and $18k.

14

I would love it if someone had a link to a site that explained how credit rating work. I have never fully been able to figure it out.

Having said that, I do know that by cancelling those two cards you made your credit worse. One thing used in calculating credit is that amount of debt you have vs the amount of available credit.

I only have 2 30 day lates in my credit history and have an excellent credit up until that point. When I bought real-estate I had no problem. I had a couple of high interest cards that I decided to get rid of. I paid them off in full and cancelled them. This affected my credit. I was refused for several cards after that, the stated reason being that my debt/credit ratio was too high and stuff like “recent unknown credit history”.

Bascically, they really don’t like it when you cancel cards.

Also, at that point, I only had 1 card with a 1,000 balance. I would usually put $500 a month or so on it and pay if off in full. But, this meant I had little available credit.

As soon as I did get another card with a 5,000 balance, my problems went away - Even though I never use it.

15

thinksnow-

The money you have in the bank will only be important to the loan officer in the sense that she/he will want to know where your down payment is coming from. So, it does affect your approval, but only in the sense that you need the money to put down on the house. It doesn’t affect your credit score.

Judging by what you’ve said, and assuming that you don’t have any credit/legal/tax troubles, and assuming that you have sufficient income to support the mortgage payment, you’ll have no trouble getting a mortgage.

These days, mortgage lenders are making some really stupid loans. They’re extending credit to those who really cannot afford it, and the debt/income ratio of the loans are out of whack with historical averages. Just about anyobody can get a mortgage right now…it all comes down to how much interest you’ll pay.

With that said, I wouldn’t be buying a home right now. This is a risky housing market, and it’s a lot more likely to fall than rise. If you’re patient, you’re probably going to get a good bargain in the near future.

16

Absolutely. The worst that can happen is that your card issuer says “no.” I did this last year with a fairly high-interest card that I’d had for several years. Normally I’d paid the balance in full every month but late in 2001 had to start making partial payments. I called the company and the rep cut my rate by 6 points. You can ask for it whether another company’s made an offer or not, but if the other company’s made the offer there’s certainly no harm in mentioning it.

17

Yeah me too. I tried searching for it online, and it was like I was reading my Hotmail Inbox again.