Category Archives: Open & Closed Accounts

Does it matter to your score who closed your card or why?

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.

Have a question or comment?  Let’s hear it!

Rapid-fire card ‘apping’ may pay in the long run, but cost in the short run

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.

Example 1: Current scenario
Card 1 Card 2 Card 3 Card 4 Combined
Balance $300 $0 $0 $0 $300
Limit $300 $300 $300 $300 $1,200
Utilization 100% 0% 0% 0% 25%

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.

Example 2: Adding new cards
Card 1 Card 2 Card 3 Card 4 Card 5 Card 6 Card 7 Combined
Balance $300 $0 $0 $0 $0 $0 $0 $300
Limit $300 $300 $300 $300 $300 $300 $300 $2,100
Utilization 100% 0% 0% 0% 0% 0% 0% 14%

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.

Example 3: Spreading the balance
Card 1 Card 2 Card 3 Card 4 Card 5 Card 6 Card 7 Combined
Balance $100 $100 $100 $0 $0 $0 $0 $300
Limit $300 $300 $300 $300 $300 $300 $300 $2,100
Utilization 33% 33% 33% 0% 0% 0% 0% 14%

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!

Have a question or comment?  Let’s hear it!

Closing many cards? Cancel with care to protect high score.

This post originally appeared September 4, 2014, on CreditCards.com as “Closing 50 cards without damaging credit score

By Barry Paperno

Dear Speaking of Credit,
I am helping an elderly friend whose husband just passed on. They have 60 credit cards with $0 balances and no yearly charges. To simplify her life, she wants to close 50 down. Her credit score is over 800. How can she do this with the least negative credit impact? All at once or some at a time? Don’t close them all? Write to each credit card company or call? — Gina

Hi Gina,
Great idea to close those cards! Not only will your elderly friend be simplifying her life by closing down the majority of the 60 credit cards she’s holding, but she’ll also be reducing the chance of identity and credit card theft. And she can do this without hurting that excellent 800+ score — if she does it right.

As I see it, there are three major factors to consider when deciding which cards to close, and when:

  1. Credit limit: This impacts both the credit utilization scoring calculations (card balance/limit ratio) and the capacity to make large purchases should the need arise unexpectedly.
  2. Age of the account: Impacts the length of credit history contribution to her credit score for as long as an account remains on her credit report — typically about 10 years after the closed date.
  3. Interest rate: Since she’s not carrying any balances, the interest rates don’t have any direct impact on her debt or credit score. Interest rates are not reported to the credit bureaus, don’t appear on credit reports and are not included in any credit scoring calculations. However, rates on the cards remaining open could be important if she ever finds herself unable to pay a credit card bill in full.

Other, less-critical factors might include weighing which card companies have provided the best service in the past and keeping a variety of cards open, such as at least one each from Visa, MasterCard, American Express and Discover, to provide an alternate method of payment in case one of the card networks is unable to approve a purchase.

Knowing how specific credit reporting information impacts credit scores is a good place to start the process of closing cards. But how do you use that information to decide exactly which ones to close, and when? From your letter I’m going to conclude that maintaining an 800+ score is most important to your friend, which will have us focusing on the first two of the three factors listed above — credit limits and account age — as they will have the most impact on her scores over time.

You may not think the size of the credit limits would matter to the score, since your friend doesn’t carry credit card balances from month to month. However, while paying balances in full before incurring a finance charge is always good for a credit score, not to mention the pocketbook, you can still damage your score by charging close to the limit and triggering a high utilization percentage prior to paying the bill off the following month. This occurs due to the way in which credit card balances are reported to the credit bureaus: The balance appearing on a credit report is the latest statement balance — regardless of whether the balance is later paid in full. If this reported balance is higher than the one reported the prior month, credit utilization can rise and the score can drop, at least temporarily, until the balance is recorded by the bureau as being paid off.

To give you an example of how a higher balance on one card one month can raise the utilization percentage from the prior month — and hurt the score — let’s say a card has a credit limit of $1,000 and the monthly charges typically add up to $100 before being paid off the following month. The typical monthly utilization for that card would be 10 percent ($100/$1,000), the kind of low percentage the score likes to see. Then one month we add a surprise major purchase of $800 to the usual $100. The utilization for that card for the month in which that $800 balance is added would jump to 90 percent ($100+$800/$1000), and would most likely lower the score. Again, this will take place despite the fact that the balance is being paid in full with no finance charge.

If, on the other hand, we have a limit of $10,000 on that card instead of only $1,000, and the same purchases occur, the normal utilization rate would be 1 percent ($100/$10,000), and would rise to only 9 percent ($100+$800/$10,000) with this major purchase — an increase not likely to impact the score. The very real possibility of such a situation makes it important to have cards left open that have enough purchasing capacity to handle that unexpected plumbing, medical or other large bill.

The other credit score-related concern when deciding which cards to leave open and which to close is the age of the account. While account age doesn’t have quite the impact of credit utilization (almost 30 percent of the score), longer-held cards contribute positively to a consumer’s length of credit history (15 percent of the score). So hanging on to the oldest cards for as long as possible also helps maintain a high score.

You also asked if it’s better to close all 50 of the cards at once or over an extended period of time. I’m going to suggest closing them over as long a period of time as possible, such as a few cards per month, or a bunch of cards every three to six months, until reaching that goal of 10 accounts left open. This way all of the closed accounts won’t fall off her credit report at once which could cause a major jolt to her score a few years from now.

To protect that high score, I recommend you start by closing the accounts that have a combination of the lowest credit limits and shortest history, a few at a time. Department store cards are a great place to begin, since their limits tend to be low and don’t contribute as positively to credit utilization as bank credit cards. Then continue closing accounts in this way until left with 10 cards having some of the highest limits and oldest open dates.

Finally, once a strategy is in place it will also be important to make sure that:

  • All requests to close accounts are made in writing, not over the phone, to the credit card companies.
  • The cards being kept open are used occasionally to prevent them from being closed due to inactivity.
  • Your friend’s credit reports are reviewed periodically to make sure the closed accounts are being reported as closed, and the open cards reported as open.

I hope this helps.  Best of luck to you and your friend!

Have a question, comment, topic idea, random thought? I’d love to hear from you!

Do student loans and closed $0 balance cards impact scores?

This post originally appeared August 28, 2014, on CreditCards.com as “How closing cards and student loans affects FICO scores

By Barry Paperno

Dear Speaking of Credit,
Will closing my credit cards, with a balance of zero, affect my credit score? Do student loans affect my credit score in any way? I’m not using my credit card to pay off my student loans. I want to close these cards because of the high interest rates and possibly open a new one where I would have a lower interest rate or receive reward points/cash back. I currently have a Macy’s card and JC Penny card and want to get rid of them. Thank you.  — Than

Dear Than,
You might think that such simple questions — asking whether to close credit cards and whether student loans affect your credit score — would bring simple answers. Well, let’s just say I’m still searching for the credit scoring question that can be answered with a simple reply. With that in mind, as simply as possible I’m going to provide a couple of examples of how closing cards can impact scores. In response to your student loan question, I’ll discuss some of the similarities and differences in how credit scorers consider the two major types of credit: revolving (cards) and installment (student, auto and mortgage loans).

Having written plenty in the past about the general impact of closing credit cards, this time I’m going to provide some very specific examples that you can apply to your own credit card situation, regardless of how many cards or what kind of credit limits you have. With these examples, I hope to help guide some of your future credit card management decisions in ways that will keep your credit score as high as it can be.

To your first question, I’ll cut right to the chase by saying that closing cards with zero balances will not affect your score — unless and this is a big “unless” — you carry balances on any of your other cards. That is if all of your cards have zero balances then you have nothing to worry about, whether you close cards or leave them open. However, if your credit reports show balances on any other cards then read on, as closing cards could hurt your score if you’re not careful.

When considering the scoring impacts of open versus closed cards, the scorer mostly looks at the credit utilization (card balance/limit ratio) calculations that make up 30 percent of your credit score. Credit utilization is the scoring formula’s way of assessing how much of your available credit is being used, with lower utilization leading to a higher score.

To answer your open versus closed cards question further, the following “before and after” scenarios will illustrate how impacts to utilization from closing cards can differ substantially, depending on whether or not you carry balances on any of your cards.

Scenario 1 (both cards have $0 balances):
Both cards A and B are open. Both have $0 balances. Combined utilization is 0%.

Before: Both cards open Balance Limit Utilization
Card A $0 $1,000 0% ($0/$1,000)
Card B $0 $1,000 0% ($0/$1,000)
Total $0 $2,000 0% ($0/$2,000)

Card A is then closed, while Card B is left open. Both have $0 balances. Combined utilization remains at 0 percent.

After: Card A closed Balance Limit Utilization
Card A $0 $1,000 0% ($0/$1,000)
Card B $0 $1,000 0% ($0/$1,000)
Total $0 $1,000 0% ($0/$1,000)

Result: In scenario #1, despite removing $1,000 of available credit, which is what happens when you close $0 balance cards, there is no impact to utilization from closing Card A.

Scenario 2 (one card carries a balance):
Both cards are open. Card A has a $0 balance, while Card B carries a $500 balance. Combined utilization is then 25 percent.

Before: Both cards open Balance Limit Utilization
Card A $0 $1,000 0% ($0/$1,000)
Card B $500 $1,000 50% ($500/$1,000)
Total $500 $2,000 25% ($500/$2,000)

Card A is then closed, while Card B is left open. Combined utilization increases to 50 percent.

After: Card A closed Balance Limit Utilization
Card A $0 $1,000 0% ($0/$1,000)
Card B $500 $1,000 50% ($500/$1,000)
Total $500 $1,000 50% ($500/$1,000)

Result: In scenario #2, removing $1,000 of available credit from the balance/limit calculations doubles the utilization percentage from 25 to 50 percent, despite the same amount of debt. While a doubling of the utilization percentage will not occur with every closed card, and your mileage will certainly vary in these situations, the simplest lesson to learn from this exercise is to keep cards open whenever possible, especially if you tend to carry balances on other cards.

To your second question, student and other installment type loans, such as auto and mortgage, will affect your score just like credit cards in some scoring categories — payment history, length of credit history, and new accounts, for example — and differently in others, such as amounts owed and inquiries.

The most critical scoring distinction between cards and loans tends to be within the amounts-owed category, where loan debt carries far less scoring weight than credit card debt, which includes credit utilization and some other debt-measuring calculations. For this reason, if you ever want to help your score by paying down some of your debt above and beyond the minimum payment, always pay your credit card balances before any loan debt.

Another difference between loan and card treatment that’s helpful to know, especially when you’re about to shop for a student, auto or mortgage loan, are the ways in which credit inquiries affect scores for these two types of credit. While no inquiries of any kind that are more than a year old will ever count in a credit score, any card inquiry from an application for credit (a hard inquiry) incurred during the past 12 months can potentially impact your score. For loans, inquiries are ignored for the first 30 days, after which only one inquiry incurred within any 14-45 (depending on the scoring model) day period can impact the score.

No doubt, this kind of information can seem anything but simple, especially when you haven’t been immersed in it for decades as I have. So, let me just summarize by saying that in addition to making all card and loan payments on time each month, if you want to play it safe with your credit score, keep as many of your cards as possible open and active — even if you don’t currently carry any card balances — to prevent, or at least minimize, any future increase in your credit card utilization percentage.You never know when a major purchase might require you to run a balance on a credit card from month to month.

Hope I’ve given you some helpful information. Best of luck!

Have a question, comment, topic idea, random thought? I’d love to hear from you!

Afraid closing cards will drop your credit score? Don’t be.

This post originally appeared July 31, 2014, on CreditCards.com as “New myth: Closing a credit card account always hurts your score

By Barry Paperno

Dear Speaking of Credit,
I have a balance of over $14,000 on one credit card. I am struggling with the monthly payment and the high interest rate, 17.99 percent. I’ve never had a large balance ever, but vulnerable me loaned the card out to a trusted friend. I have kept my credit report in excellent standing all my life. At present my score is 788. They have been making the payments so far, but over $200 a month goes to interest. At this rate, it will never get paid, and I am at the point in my life I want to buy some property and get settled. I called the credit card company and they offered to lower the monthly payment to $252, with no interest, no late fees, etc., but I have to close the account out. I know this affects my score, which sickens me. It will actually be two accounts, as I have two cards with the company.

I have always used my credit responsibly, and am not willing to let my credit go bad over this. I need to know if there is anything else I can do to remedy this and lower the interest without closing the account. I hope you can guide me. Thanks — Becky

Dear Becky,
I commend you for being a very generous and understanding friend! Fortunately, you’ve been offered a good way out of this jam by the credit card company, and I’m going to explain why I think you should take advantage of it, despite their requirement that you close the two cards you have with them.

While I also commend you on your concern for what might happen to your credit score upon closing the two cards, I’ll begin by dispelling the common myth that closing credit cards always damages credit scores. While it can happen, this somewhat exaggerated fear seems to be the most recent swing of a pendulum that has gone back and forth over the years between those who used to recommend closing cards to reduce the temptation to charge and those who now say doing so is a sure way to see your score suffer.

Let’s take a look at how your score may and may not be impacted by closing a credit card over the short, medium and long terms, and what steps you can take to protect your score.

In the short term, just as with an open card, a closed card with a balance and limit continues to be included in credit utilization (balance/limit ratio) calculations, which are some of the most heavily weighted categories of scoring, counting for almost 30 percent. Then once the balance is paid off the card is removed from utilization calculations entirely.

In the medium term, the utilization percentage on a closed card that started out high will have been paid down over time to the point where it will begin helping the score much more than when first closed. So, even if you had high utilization at the time you closed the card, your score should have improved over this time period and will keep doing so, as long as all payments are being made on time, other balances are being kept low, and very few new accounts are being opened.

In the long term, your closed cards will continue to contribute to your credit score for the entire time they appear on your credit report, typically about 10 years after closing. Open and active cards, on the other hand, can remain on your report indefinitely, making it a good idea to have a few additional cards that remain open and active for as long as possible. This way, when the two closed cards drop off your credit report, your score won’t be affected by that loss of credit history.

Based on what you’ve said about your credit situation, I don’t see your score dropping from closing the two accounts, unless you have other cards with high balances, or the card company insists on lowering the credit limits, which could cause your utilization to increase with the balance then being over limit. Yet, even if closing the cards were to hurt your score through increased utilization, not only would any such drop only be temporary, as I described above, but the saving of $200 per month in interest will do your finances a lot more good than a few more short-term points on your credit score.

Hope this helps. I wish you the best!

Have a question, comment, topic idea, random thought? I’d love to hear from you!