Which will help my credit score more
March 11, 2012 4:21 PM Subscribe
Which counts more positively to your credit score - fewer revolving accounts (credit cards) or a lower balance:available credit ratio?
Okay, during and shortly after college I racked up an insane amount of credit card debt - mostly on college and health-related expenses. I won't say how much, but I have more than the average household debt....on ONE credit card. And I have multiple cards.
Here's the silver lining - for the last few years I've been in a steady, decent-paying job, and having been making progress on my debt. I paid off my car loan and this month have gotten two credit cards (let's say cards A and B) down to 0 (well I got card A down in an earlier month, but I'm still using it for points rewards and just repeatedly pay it down each month).
I want to cancel card B, but I wonder if I should. Since I have a number of credit cards (enrolled in too many when I was young!), each month I pay the minimum balance on all my cards except whichever once has the highest interest rate - that one I pay the most I can afford (because, essentially, it's costing me the most to keep a balance on that one).
So what this means is my two highest interest rate cards, A & B, have $0 on them, but all the others are still close to maxed out. So I'm wondering, since your credit score is determined not just by HOW many accounts you have but also your balance:total credit ratio, I'm wondering if closing one account would be better or worse for my credit.
Like, making up numbers, would it be better to have 5 open credit cards and have maybe $40,000 in debt but $6,000 available, or would it be better to have only 4 credit cards and have $40,000 in debt and only $3,000 available (moving more to the "maxed out" end of things)?
Ideally, of course I'd want to get down to just 2-3 credit cards with zero balance on each, but I'm just looking at how my choices now will affect my credit score in the short-term, in case I did want to do/purchase something that requires a credit check.
Okay, during and shortly after college I racked up an insane amount of credit card debt - mostly on college and health-related expenses. I won't say how much, but I have more than the average household debt....on ONE credit card. And I have multiple cards.
Here's the silver lining - for the last few years I've been in a steady, decent-paying job, and having been making progress on my debt. I paid off my car loan and this month have gotten two credit cards (let's say cards A and B) down to 0 (well I got card A down in an earlier month, but I'm still using it for points rewards and just repeatedly pay it down each month).
I want to cancel card B, but I wonder if I should. Since I have a number of credit cards (enrolled in too many when I was young!), each month I pay the minimum balance on all my cards except whichever once has the highest interest rate - that one I pay the most I can afford (because, essentially, it's costing me the most to keep a balance on that one).
So what this means is my two highest interest rate cards, A & B, have $0 on them, but all the others are still close to maxed out. So I'm wondering, since your credit score is determined not just by HOW many accounts you have but also your balance:total credit ratio, I'm wondering if closing one account would be better or worse for my credit.
Like, making up numbers, would it be better to have 5 open credit cards and have maybe $40,000 in debt but $6,000 available, or would it be better to have only 4 credit cards and have $40,000 in debt and only $3,000 available (moving more to the "maxed out" end of things)?
Ideally, of course I'd want to get down to just 2-3 credit cards with zero balance on each, but I'm just looking at how my choices now will affect my credit score in the short-term, in case I did want to do/purchase something that requires a credit check.
Definitely don't cancel your credit cards after you pay them off -- credit utilization accounts for 30% of your FICO score so having as much available credit as possible will benefit you. Just make sure to use the paid-off cards every now and then so that the card issuers don't close your accounts or lower your limits due to inactivity.
posted by thisjax at 5:16 PM on March 11, 2012 [2 favorites]
posted by thisjax at 5:16 PM on March 11, 2012 [2 favorites]
Definitely your credit score takes a hit when you close an account, in any case. Just keep the card around and never use it and make sure any fees on it are paid on time.
There are two main reasons that closing an account hurts your score. One is that a major component of your score is the average age of your open accounts. So since new accounts will always bring that average down, leaving an old account open will help keep the average age up, which keeps your credit score up. The other major factor is your overall credit utilization ratio, which is your debt compared to your total credit limits that you want to be fairly low (ideally less than 30%). So getting rid of a card removes whatever credit limit there was for that account from the calculation, which means your utilization ratio goes up and your credit rating goes down.
If you are comfortable giving out your financial details online, CreditKarma is a good site for seeing your current credit score and related calculations, and it has some tools for simulating things like closing a credit card account. Also realize that your credit score is not the only factor that goes into a loan, for something like a mortgage your debt to income ratio will be a lot more important than relatively minor factors like how many credit card accounts you have open. And by far the most important thing is staying current on all of your debts, as long as you keep making your payments on time, you'll end up with a very good score by the time you have your debt paid off.
posted by burnmp3s at 5:17 PM on March 11, 2012
There are two main reasons that closing an account hurts your score. One is that a major component of your score is the average age of your open accounts. So since new accounts will always bring that average down, leaving an old account open will help keep the average age up, which keeps your credit score up. The other major factor is your overall credit utilization ratio, which is your debt compared to your total credit limits that you want to be fairly low (ideally less than 30%). So getting rid of a card removes whatever credit limit there was for that account from the calculation, which means your utilization ratio goes up and your credit rating goes down.
If you are comfortable giving out your financial details online, CreditKarma is a good site for seeing your current credit score and related calculations, and it has some tools for simulating things like closing a credit card account. Also realize that your credit score is not the only factor that goes into a loan, for something like a mortgage your debt to income ratio will be a lot more important than relatively minor factors like how many credit card accounts you have open. And by far the most important thing is staying current on all of your debts, as long as you keep making your payments on time, you'll end up with a very good score by the time you have your debt paid off.
posted by burnmp3s at 5:17 PM on March 11, 2012
Response by poster: And troublesome, yeah, I wouldn't ever just have one credit card, I know how that could hurt me (it's similar to having no data). But credit card debt is different from other debt, and I'd rather add on a mortgage or something....
Burn - thanks for the advice. I didn't even think of the age, credit card B IS the oldest. I will check out credit Karma.
posted by Lt. Bunny Wigglesworth at 4:05 AM on March 12, 2012
Burn - thanks for the advice. I didn't even think of the age, credit card B IS the oldest. I will check out credit Karma.
posted by Lt. Bunny Wigglesworth at 4:05 AM on March 12, 2012
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Definitely your credit score takes a hit when you close an account, in any case. Just keep the card around and never use it and make sure any fees on it are paid on time.
posted by troublesome at 4:55 PM on March 11, 2012 [2 favorites]