Help a Reader: Credit Score Problems

I recently received this question from a reader and I told him I'd post it for all of you to answer. Here goes:

I’m young (27) and live in an expensive area (Washington, DC), so I’m still renting.  I hope to own sometime in the next 3 years or so.  Which is why I’m a bit concerned over whether I’ve damaged my credit and how I should repair it.  Here’s the skinny:

I checked my credit score last February and it was good, a bit over 700.  The concern is that I have 11 credit cards.  I carry a small balance on one, which should be paid off in the next few months, and the rest are rarely used (most never).  I’m told your credit takes a hit if you cancel credit cards and have been advised not to cancel on them, rather let the card sit unused until eventually the credit card company cancels on you.  I’m guilty of having been seduced by the 0% financing offers when I made large purchases in the past.  I took the offers, put the cash in an online savings account, got my 5% or so and then paid off the balance before interest was assessed.  But this weekend when I sat down and actually figured out how much credit I have out I realized it exceeds my annual salary by quite a bit.  This is particularly troubling because I’m not even making car payments -- I own an older car that’ll likely need to be replaced in the next year or two.  I just have a lot of credit out on credit cards.  I currently using a mere 4.5% of the credit I have available, but it’s a ridiculous available amount in my opinion.  If I weren’t thinking about making my first home purchase in the next few years than I wouldn’t care, but seeing that I’m starting to position myself to do so, how concerned should I be over the amount of credit I have out?  Is it a better move to just cancel the cards I don’t use, or to have that much credit out on my name and wait for the credit card companies to quit on me?

Should I be concerned?

So, there it is. What advice do you have for him?

Comments

[Kevin]

I would think with a score over 700, closing a few of the newer accounts wouldn't hurt much. Especially if you are 3 or so years off from buying a home.

I'm pretty sure payment history and amount owed are the main factors (over 60%) of the credit score.

Personally, I had almost $10k of credit card debt (paying close to the minimums only) before a divorce and in the span of 2 years had it paid off, had closed all my old accounts, opened a new credit card in my name only and boosted my credit score up in the 800s. The only other debt I had at the time was a car loan, which I also paid off shortly after buying our home at the end of that 2 year period. You sound like you are in better shape to begin with, so I wouldn't worry about closing a few, maybe even half the credit cards now.

[beastlike]

If I were you, I would:

1. Cancel all but 2 or 3 of the credit cards.
2. Keep the credit cards that you had the longest (a long standing is important)!
3. Call the 2 or 3 credit cards that you have and ask for a credit line increase.

Years back, I had a great credit score but after my credit card number was stolen, I lowered the total credit on my cards to 5k or less. Then, when I checked my credit score the next time, it was significantly lower. If you have a avg. cc balance of 2000 and your total credit is 4k, you are using 50% of your credit, which doesn't look good. Thus, I asked the cc companies to raise my credit to 25k on both my cards so I am never using more than 10% of my credit. My score went way up again!!!

[Rebecca]

My understanding is that it isn't closing cards per say that hurts your credit, but closing ones you've had the longest. The longer you have had an account, the better it is for your score.

So pick the 2-3 that you've had the longest, close the rest, then use each of those once or twice a year so they don't get closed on you. (Pay them off quickly, of course).

[Meg]

It's not a bad thing to have a large available credit limit!!! In fact it's good because not only is that credit available to you in an emergency (a REAL emergency like job loss or family illness), but it decreases your debt-to-credit limit ratio--which should be 25% or less.

If you really don't like having so many cards, cancel all but the ones you use--but don't cancel your oldest one or two! Those are the ones that boost your score by lengthening your credit history. Since you don't have much debt it won't hurt to lower your credit limit.

By the way, it hurts your credit to request a credit limit increase on a card--just like it hurts you to apply for new credit.

[Sharon]

I have heard, like the previous poster, that the debt to card limit ratio is very important to your credit score. That being the case, I would not cancel any of the cards. And the credit card companies probably won't ever cancel them on you either. They want you and they hope that you will one day be seduced into using their card again. It would probably increase your credit score to purchase a home, but only pay interest, bank the difference in your own investments and when you get ready to buy a home in the location of your choice, you will have those funds saved up for a nice down payment. I don't know how much it costs you to rent, but paying on a mortgage even if it is interest only will probably be cheaper and if property values go up, you will stand to make some money even if you haven't put anything into the equity of the home.

[Denise]

Hi - here is a great article about this from Kiplinger.com - Kimberly Lankford is the author and writes frequently on their site. I pasted a couple of excerpts below.
-----------------------------------
http://www.kiplinger.com/magazine/archives/2006/03/credit.html
-----------------------------------
What number should I aim for?
FICO scores range from 300 to 850, but only 13% of consumers have scores above 800. The median score is 723, and many lenders require a score of 760 or higher to get the best interest rates.

Can closing old accounts help my score?
That's the most common misconception about credit scores. Closing old accounts can actually hurt your score because it raises your utilization ratio. Owing $5,000 looks a lot better when you have a $20,000 maximum on all of your credit cards -- a utilization ratio of 25% -- than it does when you have a limit of $7,000 -- a ratio of more than 70%.

Even though your credit score will dip temporarily, it's okay to close accounts as long as you don't plan to apply for a loan within the next few months. That will give your score time to recover. Close department- store accounts and new cards first.

[Margo]

11 cards is far too many to keep up with. What if someone stole your wallet / broke into the house? You've got quite a few companies to call if you need to cancel them in a hurry.

I'd keep 3:
(1) The oldest one
(2) The highest limit one
(3) The one you still owe on

If you commit yourself to paying off the last card in the next few months - and that you'll keep the old car up and running for a few months after that - your score should be in good enough shape to get a loan on the next car. Plus, if you put that monthly CC payment into savings, once it is paid off, then you can better afford to replace your car.

[Blaine Moore]

I wouldn't worry about having them open, but I also wouldn't worry about closing them. It doesn't look like you will have any credit related options in the near future, and you don't have much credit card debt, so if you are going to then go ahead. Don't obsess over it.

If you do keep some open, then the advice above is good...keep your oldest one, keep one with a high limit, keep one with a low rate, and keep the one you still owe on. Bear in mind that one card could easily hit more than 1 of those categories.

[Brad]

Meg--

Wrong. Requesting a credit increase DOES NOT hurt your credit score, whether you get the increase or not. The increase itself, if anything, will HELP your credit score. It's a new LINE of credit and the USAGE of credit that hurts your score, not an increase in available credit with current lenders.

As for the original question, the damage done to your credit by canceling cards may be minor, but it's still there. My advice is to keep them open and put most of them in a lockbox so you're not carrying them all around all the time (then you don't have to worry about them being stolen, either). The card issuer probably won't ever close the account either, so it will sit inactive indefinitely-- and this is OK.

And don't worry about how much credit you have available-- this is a good thing! The damage of having too many credit cards is done when you open them, and canceling them won't change that. Don't close them, but just use 1 or 2 (whichever have the best benefits) and pay them off every month. Keep the rest in a safe place and just check the account status occasionally for security purposes (to make sure the card hasn't been used fraudulently). Other than that, just forget about it! Your credit is good, and continuing good habits (and not opening any more cards) will only make it better.

[KC]

Did you check your detailed credit report (not just your FICO score)? See if there are any errors and dispute them to increase your score!