Busting the Credit Score Myths: Close Cards to Improve Credit Score
Dec 4th 2007 11:58AM
Updated Dec 5th 2007 8:23AM
Sometimes when you apply for a loan for a major purchase, such as a mortgage, you're told you can improve your credit score if you close some of your credit cards. Don't believe it. In fact, sometimes when you close an older card you can actually cause your credit score to go down.
Credit scoring agencies reward people who use credit wisely. As long as you pay your bills on time and don't rack up balances to max out all your revolving credit cards, your credit score won't be hurt by having a lot of unused credit lines. The best scores go to people who use credit moderately over a long period of time, so the older the cards the better.
Also, credit scoring agencies calculate the total credit available to you (the total of all your credit limits). They then calculate the percentage of debt you have outstanding on all those credit cards (total debt/total credit limits). This is called the debt utilization ratio.
In fact you could be someone who pays their cards in full each month, but because those payments are made after the report has been sent to the credit reporting agency your outstanding debt looks higher than it is. If you're trying to improve your credit score, pay your outstanding debt before the credit card company reports. Reports are usually sent monthly right after the end of a billing cycle. So, check out the amount due on your cards and pay the outstanding amounts before actually being billed. If you do this for a few months before applying for a mortgage you should see a nice improvement in your credit score because your debt utilization ratio will be much lower.
If a mortgage lender does ask you to close some cards, close the newest ones not the oldest ones or your score will actually go down rather than up.
Lita Epstein has written more than 20 books including the Complete Idiot's Guide to Improving Your Credit Score.