Will My Credit Score Hurt If I Pay Off And Close My Credit Card?
Does paying off and closing a credit card hurt your credit score? That's a two-part question. The answer to the first one is no, it helps, and the answer to the second is yes, closing your credit card hurts your credit score. Credit bureau Exerpian's "Ask Max" says,
For example, if you have two credit cards, each with a $5,000 limit, you have a total credit limit of $10,000. If you have a $4,000 balance on one card, your utilization rate is 40 percent. If you close one of those cards, your total limit drops to $5,000 and your utilization rises to 80 percent. That can have a negative impact on your credit scores.
I once talked to a guy, a father and successful architect, who was proudly recounting how he had closed down all these credit cards to punish them after they said they would mail him some things in writing but never did. I told him that while that might have felt like he was "getting them back" somehow, it was really only damaging his credit score. "Maybe that's why your credit score is lower than mine," his wife said to him innocently. His face began to contort with suppressed rage, like the surface of a lake after a fish jumps.
THE EFFECT ON CREDIT SCORES OF PAYING OFF AND CLOSING CREDIT CARDS [Ask Max] (Photo: Rev Dan Catt)
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Comments:
kudos!
That's great advice for someone who wants to maintain a good score. Shouldn't we all just go out and open as many credit cards as possible to get that low utilization rate? I know that's not the only factor in a score, but in essence, isn't that what's implied?
Closing a credit card does not ALWAYS hurt your credit score. It can actually help you qualify for a mortgage or other loan that has an in-depth underwriting process.
Closing a card will reduce your available credit. If you have 40% utilization, that may go up to 80%. But if you have 0-10% utilization, that won't go above 20%. Zero to 20% utilization is the zone to be in because it tells potential creditors you use credit responsibly and don't abuse it.
Closing a card means that you no longer have that credit available. Mortgage processors and underwriters look at not just the total utilization but exactly how high your limits are. Read another way: they look to see how much trouble you can get yourself in. Someone with $100k of revolving headroom has the potential to get in a lot more trouble than someone with only $15k.
Not every bank operates this way, but there are loads who do, especially in this credit market.
Sorry for the double post, but there's another point I forgot to mention!
The average age of your accounts also factors into your credit scores. So if the card you're about to close is the oldest card you have, you might take a hit from closing it. But if it's one of the newer cards, its possible that it is lowering the average age by itself, and closing it may actually improve your score slightly!
I'm not worried any more. I think there's enough people getting cards shut down that do well that multiple credit cards will be a sign of someone that may not pay on time.
Its fine to close expecially if you have 2-3 "main" cards and you opened that sony card for the $150 cash back on first purchase type thing, buy your goods, get the cash back then close it. The purchase and quick payment will help you out but having $1500 in liability will not, expecially if you won't use it ever again.
I have 0% utilization from month to month, so I'm pretty sure closing any of my cards wouldn't increase that too much ;)
@zacox: Even when you close an old card your average age doesn't change. The account still stays on your credit report and is calculated in the age. When the report falls off in 7 years it will THEN effect the age. By then everything else you have will be older.
@flyingember: Or someone who was doing the app-o-rama until the card companies and credit agencies started to wise up plus the process got outed by the IT security geek...
A credit score is not a "life" score - if you don't need debt then you don't need a credit score.
I have a question.
I'm about to pay off all of my credit cards in one fell swoop. Its a lot of money and its like 5-6 credit cards.
Once they are paid off, will the CC companies lower all my limits? Will my score do anything bad because of the sudden flux in ratios? Should I cancel them?
help me ya'll!
@aen: You'd lower your score if you open up lines of credit/applied for cards too quickly. Even if you have a good score, moving quickly to get lots of new credit makes them nervous.
Also, credit cards are one kind of credit/debt, and if you just have that - or have a lot more of that than other debt - they start getting nervous over that.
I think if you do too much of any one thing, your credit score suffers. Unless you are just slow, steady, predictable, and statistically normal.
@Chongo:
In my personal experience, CC companies don't generally lower your limits if you pay off your balance. However, there are some reports of CC companies doing just that, on account of the credit crunch - but I wouldn't worry about it.
Also, your ratios won't be off even if they do lower your limits - you'll have a much lower balance, so the balance/limit ratio shouldn't change much.
But yes, just cancel and be done with them.
I think this is a big $%^ing scam. You pay off a credit card in order to live debt free but you are scared to close the account 'cause your score will go down? I think this is a ploy by these greedy credit card companies to have you keep your account open and guess what... in a few months in debt again, paying 27% interest rate.
How much can your score go down after closing a card? Five points? And why is that someone with out debt is a higher risk then someone will a pile of CC bills? It is so obvious to me these companies scare us to be in debt because it's "good" for our credit scores. The hell with them all!
@Chongo: I had a longer comment that got eaten, but the gist of it was what SammyD1st said - except for the end part. Don't cancel them. If you want to prevent yourself from charging a new balance on to them, get rid of the cards physically, but keep the credit line open. You want to consider the length of your credit history, and if you've had the cards for a while, it can be good to hold on to the history associated with them.
@frank64: Some scoring models have been known to factor in average age of open credit as well as average age of all credit.
I don't doubt this seeing as how in the news lately there has been revelations that there are at least three scoring models depending on what kind of credit situation you're in. For instance, there are models for people who have filed bankruptcy, models for new account openers, and models for people with model credit. Its possible for someone to file bankruptcy and then two years later have a score in the 700s, while someone who's been around have a score in the 600s because they don't use credit often. Who is really the bigger risk?
on credit Karma my credit score is a 755 but i get an F for something because i have "too few cards"
@chuloallen: i wish i could get an in depth analysis on credit karma, but they asked me about my student loan payments and how much they are. i'm not yet in repayment, and chase and sallie mae DON'T give you those numbers until the bill's due. When I selected 0, I got, sorry you must not be you. you can't get into this account any further
@SammyD1st: No credit/bad credit, be prepared to pay a deposit on lights, phone, etc.. If the need arises to get an apartment they will do a credit check and determine your deposit based on that, bad/no credit, be prepared to pay through the nose. No credit/bad credit, be prepared for higher insurance premiums, your rates are not only based on driving history, but credit score as well, they have the right to pull your credit at any time and adjust your rate.
So credit is needed for more than borrowing money, and thinking it isn't is dangerously naive.
Agreed. Credit scores are "going into debt" scores. Too many people worship at the altar of FICO. Debit cards work just fine. Mortgages can (and are!) manually underwritten each and every day which doesn't require a credit score.
Just live on less than you make.
@chuloallen: I dont know about Credit Karma i have had the same score from them for 3 months and in that time i paid all my card off 100% ... Its a good score 765 .. but still
@oneandone: Thanks for answering. CC companies have been lowering limits, in fact there was an article here on consumerist somewhere, I think its called 'Limit chasing' or something like that. So if you have 5k limit and are at max, then you pay it down to say 4k, they lower your limit to 4k. So on and so forth until you have a limit that was a fraction of what you had. I worry about that only because It DOES alter your score, and I'd also like to have the credit available for any kind of major purchase (like new brakes on the car, etc).
I agree though, and I'll probably just cut them up but not cancel.
You don't need a credit score if you are not going to use credit. Admittedly, there may still be some benefits to having that good looking credit score, but my experience is it is not worth the risk of having that credit in my pocket. I paid off my cards about 3 years ago and am not going back. Can I mention Daveramsey.com while I am at it? Thanks.
The reason a person without credit or debt has a low credit score is because a credit score is not a measure of financial stability. It is a measure of how profitable a customer you are expected to be for a creditor.
@Chongo: If the card companies are gonna be limit chasing you, then how would you be able to end up with any available credit, even if you pay them off?
@baquwards: "they have the right to pull your credit at any time and adjust your rate."
No they don't. Not when you've frozen them. NO ONE gets their hands on them without my physically handing them over.
I'm with SammyD1st. I shut down every single card I had last year. That entailed a credit score of 730, over $100K in available credit, and 14 cards. I care not. I won't be using credit ever again.
@yospiff: What about getting utilities hooked up or renting an apartment or getting auto insurance? Those all hinge on a credit score. If yo don't mind having a bunch of money tied up in deposits to obtain services then go ahead. Around here just about every utility checks credit and requires a deposit if you have no credit or have bad credit.
Dave Ramsey has some good ideas on paying down debt (although these ideas aren't his, the debt snowball has been around longer than his books have), but unhealthy ideas about credit and credit scores. Of course it is easy to preach "no credit" when you are making millions selling books. If you never move and have to get utilities hooked up or switch car insurance and buy your cars outright, then it will be easier than for the rest of us.
CREDIT DOES NOT EQUAL DEBT! If this is hard for someone to comprehend, then it is best that they don't jump into the credit pool.
@baquwards: "What about getting utilities hooked up or renting an apartment or getting auto insurance? Those all hinge on a credit score."
I have all those things, and yet, not a single credit card.
"If yo don't mind having a bunch of money tied up in deposits to obtain services then go ahead. "
A bunch of money? How much deposit do you think the electric company really wants? As far as an apartment goes, you're making the deposit whether you have credit or not.
"CREDIT DOES NOT EQUAL DEBT!"
For most people, it does.
@wagenejm: It might have an effect on your average age of accounts, though, which is also factored into credit scoring. Shame "Experian's Max" doesn't mention that part, really. It's not all about % utilization.
Since there are people knowledgeable in credit reports in here, maybe I can get some help to a similar question. I have about 25K in student loans that I have been paying for about 1.5 years now, which is the only non-revolving loan history I have (no car loan or mortgage yet). No credit card balances on four open cards. A family member offered to pay off my student loans, and I can repay her for a fraction of the interest (plus the benefit of being able to float my due date around if needed). What will this do to my credit report? Should I do it, or am I building key credit history with these student loan payments?
@Skin Art Squared: You are right on the freezing thing.
Good for you, I have plenty of self control, so I will take the convenient route and keep a few credit cards and promptly pay them off. Debit cards are too risky for me.
@Skin Art Squared: My last apartment would require a $1000 deposit if your credit was bad, $100 if it was good (mine was $50 for being with a preferred employer, why even bother, but whatever). The power company's deposits start at $90 and go up to $300 depending on credit, credit over 700 requires no deposit. This is how things operate around here.
@jdsmn: I think that zero reporting debt would look good on your report. But for me personally borrowing money from family can be a messy affair, something to think about.
@SammyD1st: True to an extent. But good luck buying a house if you don't have a good credit score. Unless you're paying all cash, of course.
@jdsmn: ==> "Since there are people knowledgeable in credit reports in here, maybe I can get some help to a similar question."
Have you been reading the comments? Nobody here has a clue about credit reports other than what is in theirs. There is so much conflicting information out there, how can you believe one thing over another. Credit is bad, Credit is good, Credit means debt, don't close your accounts, keep them open.... it is endless.
Here is all you need to know. Don't worry about your credit unless you have done something to make it bad. I'm talking about defaulting on a loan, or filing for bankruptcy or something. Just check it once a year to make sure the evil you isn't out there terrorizing the world in your name.
Ken
FICO 755 baby
@aen:
A lot of people (particularly the FatWallet crowd) subscribe to this theory. However, like oneandone pointed out, you will take a significant hit to your score if you keep opening up new lines of credit. It also makes creditors nervous when you have so much available credit.
@ZukeZuke:
I agree. Yes, some people wear their credit scores like badges of honor. Others, however, don't care at all. I think both sides are in the wrong. Take care of your credit, but don't obsess over it!
Having bad or no credit is like having your hands tied behind your back.
@baquwards: "My last apartment would require a $1000 deposit if your credit was bad, $100 if it was good"
That sounds like a stroke of luck. Every place I've ever seen has required one month's rent as the deposit. I've never seen anything else. Sometimes more if you have pets or something.
"CREDIT DOES NOT EQUAL DEBT!"
For most people, it does.
Ummm, no. This does not prove that available credit = debt. Your statement simply shows that SOME people abuse it.
Also, you said that you don't have any credit cards and still managed to get utilities, etc. Well, you must have something ELSE on your credit report besides credit cards, like an auto or student loan. Otherwise, you would end up having to pay deposits, etc.
@DePaulBlueDemon: "Well, you must have something ELSE on your credit report besides credit cards, like an auto or student loan. Otherwise, you would end up having to pay deposits, etc."
No, I paid the deposits. I paid a deposit on my house that I rent, which I would've had to do anyway. I paid a deposit for my electric service, which was a few hundred bucks. Not a big deal. I don't carry loans. I pay for my cars new from the dealer in cash. Others do too. Others buy used cars paid in full, in cash. I know some people who have bought houses in full in cash.
I've played the credit game. I didn't like it. I've been on both ends of it. Bad credit, and stellar credit. I opted out.
Deposits on things like electric are never so big that they are unattainable. And credit is not required to live in this world. They'd love for you to think so, but it's simply not true. In fact, the whole credit system hasn't been around all that long.
@jdsmn: I think you should go for it. It won't effect your score negatively, and you won't have payment to a company with interest attached to you anymore. Now, say if you have some dire emergency (read: unemployment, catastrophic injury, whatever) you will have more wiggle room because your loan holder is someone you know personally, not a cold blooded bank.
I say take advantage of the opportunities given you. :)
Seriously, when are people going to realize that your 'Credit Report' is the biggest fraud in history. It's meaningless. Absolutely meaningless. Your assets are far more important to any bank of loan than your credit score. If you have a steady job, and regularly make you bill payments you will have no problem getting a mortgage or a car loan. If you don't have a job, but have excellent credit, you are still going to have a hard time getting any type of loan.
Your 'Credit Report' is meaningless, and it's a fraud. Don't worry about it. Instead, live beneath your means, have a healthy savings, keep your insurance current, and your credit report will take care of itself.
@oneandone:
That's what I'd do. Just cut them up and don't use them anymore, but keep the accounts open. I have some that have just sat open and unused for years.
@zekebullseye: That's a good idea too, but beware any cards you have that impose annual fees, or even worse, "inactivity" fees. Leaving the accounts open can present you with another host of problems. If they slap a fee on your account and you don't become aware of it because you've cut them up and aren't as vigilant about them any more, they can and will send you to collection for those unpaid fees.
I have, what may be a naive question, but does anyone actually KNOW, for a fact the algorithm that FICO uses to calculate credit scores? Isn't the company private and their credit rating algorithm a trade secret as is the 3 other companies that offer credit ratings?
Isn't what all this advice amounts to is a theory of how credit scores "may" be calculated?
@chuloallen: I tried to see what would happen if I closed my oldest account, it didn't change anything.
@jdsmn: I would take the pay off offer. If you have some revolving credit history and already have 4 credit cards, chances are you have a good credit report & score.
Why pay a higher interest rate to Sallie Mae or Citibank? For a credit score? Just wouldn't make sense.
I'd take a student loan pay off in a second.
@dallasmay: I do find that having a great credit score has definitely gotten me apartments, since most people seem to have bad or poor credit. I'm a freelancer and rarely have a steady source of income, but it reassures people when despite your lack of employment you still have an excellent credit score.
I don't really have anything to contribute as far as credit scores go, but I just wanted to say that the accompanying photo is amazing and has had me trying to hold back all of my laughter for the last five minutes. I was kind of having a crappy day, this photo brightened it just a little.