Close a Credit Card Account – Kill Your Credit Score

I was in a rare fit of anger.Last summer I got so mad at American Express, I closed a personal credit card account that I had just opened with them.The lady I spoke with at Amex was a complete idiot…and clearly working in the wrong department. I thought I was talking to a person incustomer service…she obviously worked for the sales prevention unit.It felt empowering when I told her to, “close the account,” and promptly hung up the phone.Then I realized what I had just done…Closing Credit Card Accounts is a Fast Track to Lowering Your FICO Credit ScoresYou want to avoid closing credit card accounts at all costs.If you want to do something to irritate the credit card companies–pay the account off with pennies…never carry a balance so that theydon’t earn any interest…pay your account in full and add a dollar to your payment so they have to send you a reimbursement check for adollar…anything to irritate them. Just don’t close your account!Fortunately, I escaped without any significant damage to my credit scores. The account was so new that I wasn’t really getting anythingpositive out of it yet anyway.I was lucky.Had the account been several years old with a clean payment history, my credit scores would have tanked.Why is Closing Credit Card Accounts Unhealthy for Your CreditHere’s why…one of the categories that makes up your FICO credit scores is called “time in file.”In English, “time in file” translates to:- How old the oldest account on your credit report is, and- The average age of all the accounts on your credit reportThe longer you have the same accounts the better it will be for your FICO credit scores. (And it is in your favor if those accounts are ingood standing.)I’ve had the opportunity to study a few credit reports where the consumer obtained FICO credit scores of over 800.These folks are like the white buffalo. They’re very rare and rank in the top 5.85% nationally. This means their credit scores are higherthan 94.15% of the rest of the people in the country.One thing the, “800 Club” members all have in common are several old accounts appearing on their credit reports. When I say “old,” I meanreally old…decades in some cases.One example is from a guy from Georgia who had a Sears credit card on his credit file that was opened in 1954. It actually said that on hiscredit report…opened in 1954. (That means that his credit report is 52 years old.) His lowest FICO score was 809.Bottom line: an old credit history is good for your credit scores. And you can’t achieve an old history if you close your accounts.How to Increase Your Credit Scores by Keeping Your Credit Card Utilization LowThe second problem with closing credit card accounts has to do with utilization.I know that’s a “techie” word, but I can’t think of a better one to describe it.Let me try to “Homer Simpson” it for you…Let’s say you have 10 credit cards, and each of them has a $1,000 credit limit. Your total credit limit would be $10,000.Now let’s assume you’re maxed out on 5 of the 10 cards. So your total balances on those credit cards equals $5,000.Your utilization percentage would be 50%.The higher your utilization percentage–the lower your credit scores will be.Recently, I’ve read articles saying that a 50% utilization percentage should be your goal. They’re wrong…really wrong. There is no magicutilization percentage.Your goal is to keep your revolving balances as close to $0 as possible. If you can do this, you’ll be on your way to obtaining the highestscores.OK, back to our credit card utilization example. Let’s say you have not used the other five of your credit cards (the ones with a $0balance) in years. In fact, you’re not even sure why you still have them.So, you decide to close all five of those accounts.Can you guess what just happened to your utilization?By closing those 5 unused accounts you are now 100% utilized on your remaining cards…completely maxed out!Your scores take a nosedive like a plane that ran out of fuel…or the singing career of William Shatner …or Lindsay Lohan’s sobriety.
Not good.But let’s say you’ve already closed some old credit card accounts. What can you do?Here’s what to do:1. Reduce your credit card balances on all your remaining cards.2. Increase the credit limits on the five cards that are still open.3. If you’re a small business owner you should have corporate credit cards–use them instead of your personal credit cards.Be Careful When You Increase Your Credit LimitsEarlier I talked about how you can keep your credit scores high by increasing the credit limits on your existing credit cards.But be careful…increasing your credit limits doesn’t mean you should increase your spending limits!Remember, the idea is to use your increased credit limits to LOWER your utilization, not buy more stuff.To increase your credit limits, simply call your credit card provider and ask for a, “credit limit increase.” But, do so only if you have agood payment history.When you call the credit card company and ask for a limit increase they’ll review your credit report(s), which will cause a credit inquiry.This type of inquiry will lower your scores.How much?Based on our research, each inquiry can decrease your score by as much as 12 points.There’s another type of credit inquiry called an “account management” or “account review.”This is when a credit card company periodically reviews your credit reports to determine if your credit limits should be increased.The good news–this kind of inquiry does not lower your credit scores. The bad news–they may only review your reports once each year. And,there is no guarantee they’ll significantly increase your credit limits.So, you have to judge if the credit inquiry is worth it. I personally believe it is–especially when you have a specific credit inquiryreduction plan in place.There’s also one more negative effect that closing credit card accounts has on your credit scores–it starts the clock ticking.And when that clock hits seven years the credit reporting agencies usually delete that information from your credit reports.That’s fine when the information is negative. We want negative information to go away.But we never, ever want good information to be removed too soon. We want good credit history on there for the longest time.Remember, only information appearing on your credit reports will influence your credit scores. So, if you have a lot of good creditinformation, but it doesn’t appear on your credit reports…it won’t help your credit scores.If you want good scores, make sure you have a lot of old accounts on your credit reports. And don’t limit your own scores by closingaccounts!

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