This post originally appeared July 13, 2017 on CreditCards.com as “‘Q&A: Closing maxed-out card won’t lower credit utilization”

By Barry Paperno

Dear Speaking of Credit,
I have three credit card accounts with a total credit of $23,000. One account is paid off monthly, the other two are maxed out. Total credit debt is $10,800 between those two. Would it help my utilization ratio if I close one of those maxed-out accounts? – Millie

Dear Millie,
There are some good reasons for closing a credit card. Ending an annual fee and minimizing the chance of fraudulent use are just a couple. Yet, contrary to popular belief, helping your credit score is not a good reason to close a card.

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This post originally appeared June 1, 2017 on CreditCards.com as “‘How will closing secured card, opening unsecured card affect credit?”

By Barry Paperno

Dear Speaking of Credit,
I have a CD at USAA for $500, which secures my USAA American Express card for a $500 limit.

My FICO score is now where I can qualify for an unsecured card, but USAA will not convert my AmEx to an unsecured card. They insist I have to close the AmEx and open a new unsecured AmEx.

Will that affect my credit score? Will I lose all of the good credit history? – Jerry

Dear Jerry,
Great job of using that secured card to help rebuild your credit! Now that your score qualifies you for an unsecured card, it’s smart to be concerned about any possible credit scoring effects from closing the secured card and opening a new unsecured one.

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This post originally appeared April 27, 2017 on CreditCards.com as “‘Will paying down closed card debt help my credit score?”

By Barry Paperno

Dear Speaking of Credit,
I went through some tough times and wasn’t paying on the credit card I have through my bank. The bank ended up closing the credit card account. I have been making payments on the “closed card” for about six months now. Is this helping my credit score in any way? Or is it making my score worse because I have a “closed” account?

No matter what I do I can’t seem to get my score above 640. I have another credit card I make regular payments on, and I have a personal loan through my bank that is on automatic pay each month. My husband and I want to buy a vehicle and a house within the next couple of years, but I would like my score to be above 700. How do I get there? – Aislynn

Dear Aislynn,
Let’s take a good look at how that closed card might be impacting your credit score now that you’ve been paying on time over the past six months, and what the future may hold.

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This post originally appeared October 6, 2016 on CreditCards.com as “Don’t close your credit card accounts to win a mortgage”

By Barry Paperno

Dear Speaking of Credit,
I have excellent credit and the four credit cards keep raising my credit limits, which is hurting me when I go to apply for a home loan because they consider the amount that is available something that can be used. What can I do to close two of them and limit the amount of the other two without hurting my credit score? – Barbara

Dear Barbara,
My first reaction to your question is to recommend finding another mortgage company. Closing cards and lowering limits should not be a requirement for loan approval. Research has shown that reducing the amount of available credit, whether by closing cards or lowering limits, does not by itself reduce the risk of future missed mortgage payments. Unfortunately, some lenders seem to have missed that memo.

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This post originally appeared April 21, 2016 on CreditCards.com as “Card account isn’t closed if annual fee still charged”

By Barry Paperno

Dear Speaking of Credit,
I have a credit card that expired four years back. I have not renewed it, but I have a balance which I still paid until now. But every year the company charged me an annual fee, even if I am not using the card anymore, and it’s been expired for years because I am residing now in a different country. I have complained to the company asking why I was continuously charged even if I am not using their services anymore. Is this legal for them to charge me? – Eva

Dear Eva,
Despite your card having expired four years ago, the fact that you’re continuing to be charged annual fees tells me the card company still considers that card to be open in at least one respect – charging that annual fee. I’ll leave your question of its legality to the legal experts, though, legal or not, most of the major credit card lenders do not charge an annual fee once a card has been closed, regardless of the remaining balance amount.

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This post originally appeared March 31, 2016 on CreditCards.com as “Pay off revolving card debt first over installment loan”

By Barry Paperno

Dear Speaking of Credit,
I am paying off my debt and have a credit card and installment loan open, both with about the same balance. The installment loan has a high interest rate, much higher than the credit card. In terms of helping my credit score and avoiding interest combined, which balance would you suggest I pay off first? – Bill

Dear Bill,
As I see it, the conundrum you face in your attempt to both lower your interest expense and help your score by initially paying off one of your two balances is that the higher-interest loan you want to pay off first is the debt having the least impact on your credit score.

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This post originally appeared February 25, 2016 on CreditCards.com as “Credit utilization rules for managing your credit score”

By Barry Paperno

Dear Speaking of Credit,
Good morning, My credit score is 739 and I have a total of 12 credit cards in my history; however, I only use four cards out of the 12. I just want to know if it will hurt my credit if I leave the cards that I don’t use open with a $0 balance or should I close them? Also, my average age of credit history is poor. How can I improve my status and how long do you advise I should wait just in case I would like to open another card or finance a car or house? — Jennifer

Dear Jennifer,
As you’ll see, one benefit that goes along with good credit — which is what you have with a 739 score — is that you have more freedom to open and close cards without the harm that can befall someone with a lower score. And while it’s hard to find many facts about credit scoring that are true for everyone, regardless of their score, there are at least a couple I’ll apply here:

• Leaving cards with $0 balances open will never hurt your score.
• Closing cards, with or without a balance, will never help your score.

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This post originally appeared August 27, 2015 on CreditCards.com as “Credit card advice for a ‘debit card kind of guy’“

By Barry Paperno

Dear Speaking of Credit,
Hello, I am in a dilemma, and constantly get different advice. Here is the scoop. I have four open bank credit cards, three with Chase, one with American Express. Of those, I just now started to use the American Express, and one of the Chase ones. The other two are dormant for a couple years. They both have a low credit limit. I was always a debit card kind of guy, since I found spending money I have is easier to manage than spending money I don’t have.

In addition to these cards, I have four cards from department stores. I got them when I was younger, since opening a credit line got me a discount on the purchases (pretty stupid, I know). But with large purchases it made sense.

Now I have a total of eight cards. I was thinking of closing all the department stores ones. They all, however, have a high credit limit. I was told that closing those cards will damage my credit score significantly. Please let me know what I should do. I would like to downsize to only two, maybe three cards, but closing five would probably damage my score. I don’t have any debt, besides for my student loan, and I just finished paying off my car a couple months ago. Any advice will help, and thank you in advance. — Jacob

Dear Jacob,
As your comments suggest, there seems to be no shortage of conflicting information out there about how many cards you should have, whether you should close some of your cards if you have “too many,” and whether closing cards will help or hurt your score. As such, I don’t blame you for being a “debit card kind of guy,” though now, for some reason, you appear to be headed back to also being a “credit card kind of guy.”

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This post originally appeared December 25, 2014, on CreditCards.com as “Closed accounts affect your credit score, but maybe not how you think“

By Barry Paperno

Dear Speaking of Credit,
Several years ago, Texaco sold out its stores in our geographic area so my credit card has been unused for two years and no balance is due. I received a letter informing me that my card would be canceled for nonuse. My question is this: Since it is being canceled for nonuse and not because of a delinquency, will this still have a negative impact on my credit and, if so, what can I do about it? Apparently the old card dies sometime in December even though the expiration date is March 15.  — Paul

Dear Paul,
Closing accounts can definitely hurt your score, yet there’s nothing about the “nonuse” reason, just as there’s nothing about it being closed due to delinquency, that impacts a score by any more than a card being closed at the cardholder’s request. That is, a closed card is treated by the score simply as a closed card without regard to why it was closed or who — the creditor or cardholder — initiated the closing.

As for what you can do about it, it sounds like a done deal, especially since a card issuer can close a single account or large set of accounts anytime it wishes.

Still, yours is a good question, because it allows me to knock down some myths about credit scoring. It’s one of those subjective, credit-related assumptions that fell out of favor when credit scoring began some 25 years ago, but that consumers and even some lenders continue to believe are baked into credit scores.

A few such negative assumptions include:

• A card indicating “closed by creditor” (or in this case, “closed due to nonuse”) on the credit report might be the result of some underlying negative information that the creditor closing the card has knowledge of, and that isn’t reflected on the credit report.
• An inquiry not accompanied by a new account from the same creditor on the credit report indicates the application was denied, since, had the application been approved, there would be a new account appearing on the report.
• Even for consumers with a flawless payment history, a high amount of unused available credit points to a higher likelihood of future payment problems, should the cardholder be faced with a situation in which the temptation to charge excessively would be too great to resist.

While these kinds of credit decision-making factors may still be alive and well within a particular card issuer’s policy criteria (subjective reasons, not related to credit scoring) or custom credit score developed for its own use, they are not part of any widely used credit scoring systems, such as FICO, for a simple reason: such information has not been shown to be reliable predictors of future credit risk.

Returning to your question, there are two categories within your credit score where the closing or canceling of your Texaco card could possibly have a negative impact on your score: One that could take effect immediately, the other a number of years into the future.

The first example is one that warrants your immediate attention, since it could affect the “amounts owed” portion of your score, which makes up almost 30 percent. Specifically, this is your combined credit utilization percentage (total card balances/credit limits) that, once it gets higher than 25 percent or so, could be impacted when any card is closed. At such a percentage or higher, removing the amount of available credit provided by this account, which is what will happen when the card is closed, is likely to increase the credit utilization percentage and lower your score.

If, on the other hand, your total card balances currently make up only a small percentage of your available credit, there shouldn’t be much, if any, change to your overall utilization percentage when the credit line from the Texaco card is removed from the scoring equation. Hopefully, your total balances are low, in which case you have nothing to fear — at least for now.

The second possible outcome from closing this card is one that could only occur well into the future via a set of scoring calculations, “length of credit history ,” that makes up about 15 percent of your score. It is an outcome that you should be particularly aware of if this card is one of only two or three open cards you carry. It is also one you can forget about entirely if you have more than a couple of other cards — older the better — that you intend to keep open and active indefinitely.

While your score will continue to include account history from all closed, as well as open, cards for as long as they remain on your credit report, the credit bureaus remove closed accounts in good standing after about 10 years and closed accounts with a history of late payments after seven years from the date of the delinquency. Once an account no longer appears on your credit report, it’s the end of the line for that account having any impact, good or bad, on your score. But again, as long as you retain at least a few open and active cards well into the future, any such long-term effect on your length of credit history will be zero to minimal.

Going forward, I would focus on paying down any high card balances, if you have any, to minimize the possible impact on your credit utilization percentage from the loss of the Texaco card’s credit line. If you don’t have any high card balances and thus low credit utilization, take this opportunity to give yourself a well-deserved pat on the back, as the closing of this or any other card should do your score no noticeable harm. Just expect to see that Texaco card on your credit report for years to come, continuing to contribute positively to your credit score. Then once it’s gone in ten years or less, as long as you have a few other open and active well-established cards in good standing, your score won’t even miss it.

This post originally appeared December 4, 2014, on CreditCards.com as “Opening 3 cards at once dings credit score, short-term“

By Barry Paperno

Dear Speaking of Credit,
Hi, I am looking to open up three credit cards, but before I do, I would like to know if that will hurt my credit. I currently have two that I am not using ($0 balance) and one that I am using has a very low balance also, and one “finance card” I applied for with Apple to pay for my computer (also $0 balance). I have in total four credit cards before the three I am looking to open. What are your thoughts about opening three credit cards at the same time, or within a week’s time? Thank you so much for your help!! — Yen

Dear Yen,
There are some changes to your credit report, such as late payments, high credit card balances, and bankruptcy that are never good for your credit score. Though there are some differences among them in terms of severity and time required to fix the damage, there are no scoring benefits — long or short term — when negative items such as these hit your credit score.

Then there are some changes that are almost always good for your score, such as current payments and balance reductions, no matter how many ways you slice and dice the data.

And then there are actions that can be both good and bad for your score, depending on such short and long term credit goals as a car or home purchase. This is where the subject of opening new accounts enters the picture.

More often than not, the immediate net effect of adding new accounts is a lower score. Yet, in the longer run — six months to a year — the result of having added new cards can be a higher score than would have otherwise been achieved, thanks to the lower credit utilization (individual and combined card balance/limit percentage) that often occurs when the amount of available credit increases. Credit utilization affects your score both on the individual and combined account level, such that even if your combined utilization percentage is low, having any highly utilized cards within that combination can keep your score from being as high as it can be.

Three scenarios
To best explain, I’ll run through some examples. While you haven’t told us the credit limits on your four cards, for demonstration purposes let’s say the one card on which there is a low balance also has a low credit limit. We’ll also say that the card has been maxed out with a $300 balance/$300 limit and that your other three cards are open with zero balances and $300 limits. Then we’ll see what the addition of three new cards might do to your combined credit utilization percentage.

In example No. 1, while your combined utilization of 25 percent isn’t bad, it can be improved. More importantly, in the current scenario your score is going to suffer from that 100 percent individual account utilization on Card 1.

To illustrate how your combined credit utilization could be reduced by doing nothing more than adding three new cards, we’ll use the existing examples and add three cards, also with $300 limits and zero balances.

In example No. 2, while still having that problematic Card 1 at 100 percent utilization, the addition of these three new cards has improved your combined percentage by 11 percent (25 percent minus 14 percent). It could improve even further with higher limits on any of the new cards.

In the next, and last, example, we’ll see how, in addition to adding three new cards, your individual account utilization could look better had those $300 in charges been spread out among a few cards rather than just the one.

In example No. 3, we see that owing the same amount, but charging smaller amounts on three different cards can also help your score through lower individual account utilization, though you can also accomplish this without adding any new cards.

Now for the bad news. As I said earlier, any time a new account is added to your credit report, whether it’s a credit card, auto loan, mortgage, or any other type of account, you can expect your score to drop at least slightly, despite any lower individual or combined credit utilization achieved by increases in available credit.

Keep in mind that in addition to three new accounts appearing on your credit report you can expect three new inquiries further impacting your score for the first of the two years all inquiries remain on your credit report. Unlike multiple mortgage, auto and student loan inquiries that are treated as a single inquiry when incurred within a narrow time frame, the scoring formula is not so forgiving of credit card inquiries, as each one can potentially affect your score.

The general reason that scores are designed to drop with the addition of new accounts is that research into consumer behavior has consistently shown that consumers who have opened new accounts recently tend to be at greater risk of default than consumers who have not.

It’s impossible for anyone to accurately estimate how many points you can expect to lose from opening new cards without knowing your current score, utilization percentages, length of credit history and many other factors. Don’t sweat it too much, though: New accounts make up just 10 percent of your score. And while the amount of the score drop can vary, a piece of good news within the bad is that you can expect to recover any lost points from new account openings within six months to a year — assuming you pay on time, keep your card balances low and don’t open any more new accounts.

So, while I can’t recommend either way, I will conclude by strongly suggesting that if you plan to buy a home within the next year, do not open any new accounts, as you’ll want your scores to be as high as possible to qualify for the best mortgage rates. And as to whether you should open three new cards the same day or a week apart or even a month apart, the same impacts to your score will apply — just over a slightly extended period of time.

I hope this information has been helpful and I wish you the best!