Today’s reader question comes from our Debt Movement Facebook page.
I have an open, old credit card account. I don’t want to close it because it helps my credit score, but I have no balance on it. It has a $6,000 credit limit. Should I close it or at least lower the credit limit on it? I have another credit card I like better with a large balance $6,000 that I’m paying down this year. I’d like to keep that one to use and should I lower that limit too once I get it paid off.
If you want to raise your credit score, know that you should never close an account, nor should you ask for the limit to be lowered. Here are a few credit repair tips that I can offer as explanation:
- A big part of your score is the age of your accounts. Closing an old account can lower the average age of your accounts and, in turn, lower your credit score.
- It sounds like you have only two credit cards. The credit-scoring formula will respond best to people with at least three and no more than five credit cards. Why at least three? They need enough information to judge you, and one or two credit cards simply is not enough information.
Ultimately, if you want the best interest rates, you should have a 720 credit score. I’ve rarely seen people with 720 credit scores who have fewer than three active credit cards on their credit reports. But I have seen my fair share of people with more than five credit cards who still have a 720 credit score (or higher).
If you already have more than five credit cards, you best course of action is to pay off your extra cards and let them go inactive. Do not close them. Do not reduce the limit.
- Your three-to-five credit cards should be kept active. If you do not use them, the credit-scoring bureaus will not know whether you can juggle multiple debt obligations, and they will assign you a low score. Better safe than sorry, they will think.
You can keep the cards active by setting up an auto-pay on a small monthly bill, like your gym membership or a magazine subscription. This way, you keep the card active while still maintaining the low balance.
- Part of your score is based on your balance-to-limit ratio. The credit-scoring bureaus look at both your individual accounts and your collective debt as a percentage of your collective limit. This is called a “utilization rate,” and in both cases, the closer you are to a 30 percent utilization rate, the better.
Let’s say you have two credit cards. One of them has a $6,000 limit and a $6,000 balance. In other words, you are maxed out. On that credit card, your utilization rate would be 100 percent, which would not earn you any points with the credit-scoring bureaus.
Assume now that you have a second credit card. This one has a $6,000 limit and no balance. On that credit card, you have a 0 percent utilization rate, which is great for your credit score. And your overall utilization rate (assuming those are the only credit cards you carry) would be 50 percent, which isn’t great.
- Since I don’t know the limit on your card with a $6,000 balance, it’s hard for me to tell whether that card is hurting or helping your credit score. If the limit is not at least $20,000, it is likely hurting your score.
You see, the credit-scoring bureaus will respond best to people with no more than a 30 percent utilization rate. So in your case, if the card with a $6,000 balance does not have a limit of at least $20,000, you have exceeded the 30 percent rule.
If this is the case, you should transfer $1,800 to the card with a $6,000 limit. This way, you maintain a low utilization rate on the card with a $6,000 limit, and you lower the utilization rate on the card with the $6,000 balance.
Keep in mind that my answers are always based on a credit-scoring perspective. You might have valid reasons for wanting to close your credit cards.
For instance, if you have a long-term habit of abusing credit, your finances will probably be much better off if you live a credit-free life while adjusting your spending behaviors. But from a credit-scoring perspective, you are better off keeping the card open.
About the Author:
Philip X. Tirone is the creator of The Free Credit Score Webinar and the 14-Day Credit Challenge, both of which teach consumers how to achieve a 720 credit score. You can visit his blog on how to raise your credit score at 720CreditScore.com.