Help Some Readers: Lots of Credit Score Questions

I don't know a lot about the ins and outs of how to get/keep a great credit score. I simply follow my own advice -- spend less than I earn, have no debt, save a bundle, pay off my cards every month, etc. and it's worked out give me a great credit score.

Recently, I've had several credit-score-related questions sent to me by readers and I'm not sure how to answer them. I thought some of you smart people out there would, so here goes. The first question -- on changing credit cards:

After evaluating my spending and travel habits, I'd like to cancel my AmEx Delta SkyMiles Card and instead get an AmEx Blue Cash card, especially because of the annual fee and the hidden costs of redeeming a $99 companion fare ticket. What is the best way to do this without harming my credit? (I have about $1,700 debt on the SkyMiles card but I have a budget and plan to pay it off by December).

Next is a question about canceling multiple cards at once:

My husband and I have 6 or more credit cards that we do not use (zero balances).  Would it be bad for our credit score to cancel all of these cards at once?  (we have an excellent score currently).

And finally, a question on the number of credit cards one should have:

My husband and I have finally paid off our credit card debt!  Just a few years ago, due to reasons that I don't need to go into, we were carrying about $50,000 in credit card debt.  I had to keep shuffling the balance around to different cards to take advantage of promotional rates.  As a result, we now have about $130,000 in combined credit lines on about 10 credit cards.  We predominantly use our American Express and Target VISA cards for every day purchases to take advantage of their respective rewards programs and pay them off every month.  The other credit cards are not used, and I would like to cancel at least some of them.  Despite racking up this huge debt over several years, our credit scores have remained very good, and we would like to keep them that way.  My question is this:  how many credit cards and how much available credit should we keep to maintain our credit scores?  Is it o.k. to cancel all of the extra cards at the same time, or should we do it gradually?  Any advice would be appreciated.

Any words of wisdom out there?

Comments

[Mark]

I don't know the exact percentages (might be as high as one third), but I remember reading that the "debt to credit" ratio plays a big part in determining your credit score. Another factor is credit history as well.

For example, if you have 6 credit cards, all with $1000 credit limits, you have $6000 of available credit. If you charge $2000 on those cards, your debt to credit is 1/3 (2000/6000). Say you then cancel 3 of the 6 cards, but still run up 2000 of credit card debt. Your new debt to credit ratio is 2/3 (2000/3000).

I think if you have the financial responisibility to do so, I would keep any cards that do not charge an annual fee in a shoebox somewhere. That way you would not be staring at them everyday, and would be less likely to use them. However, the available credit and credit history would still be on file, positively impacting your score.

For the user with the Delta Skymiles card...I'm not sure what the best scenario would be here. I know applying for new credit negatively impacts your credit score, but so would cancelling the card outright due to the debt/available credit explained above.

I'd want to think that you should apply for a credit card first, so that way your available credit increases, and then cancel the Skymiles card.

However, since I'm no expert (as you can probably all tell by previous posts) I'm sure other users can comment with a little more detail as to why it might be better to not cancel cards if possible.

[Trent D.]

I recommend only canceling cards in two situations:
1) You can't control your spending. It sounds like you don't have this problem.
2) You simply can't keep track of the cards you have open, and that makes you uncomfortable.
Response to "Too many credit cards":

There's really no such thing as having "too much credit", and your utilization ratio (open credit lines compared to balances) needs to remain low to max out your credit score. By canceling cards, you will inevitably raise your utilization, therefore lowering your score.

Another negative side effect of closing cards is that "average account age" is also considered. If you close a bunch of accounts, you will probably negatively affect your average age of credit lines, hurting your score.

So my advice is as follows:
1) If you decide to close accounts, close the ones with the lowest credit lines, or the newest accounts. The oldest accounts and the ones with the largest credit lines are the ones helping your score the most.
2) If you can control yourself and keep track of your accounts, don't close any at all.

[Richard]

Another thing to consider is what you need your credit score for.

eg. We have a credit card which we want to close. However, we're going to get a mortgage at the end of this year and our credit scores are very good. Until we have signed for that mortgage, we're not going to rock the boat.

If you're not taking out loans, then your credit score might not be that important.

Along with the other responses, I've also heard that among the things that affect your credit score are the average age of the credit, and the credit utilization.

[Kevin]

Re: #1 - maybe the cardholder could call Amex and request a switch from the SkyMiles card to the Blue. I did this with Chase to get a Signature Freedom card about a year ago. That way he/she wouldn't lose the card's history in their credit report.

Re: #2 & 3 - are they planning on doing anything significant like buying a house or car in the near future where a temporarily lower score would hurt them? If so, then possibly hold off, otherwise I would close all but the 2 longest owned cards or the ones they use the most.

Here's a helpful link about what makes up FICO scores:
http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx

Note: the proportion (ratio) of credit used is only one part of the 30% in the "Amounts Owed" category.

[Sara]

@Kevin and #1: To save you the trouble, I actually called regarding just that (switching from AmEx SkyMiles to Blue Cash) and they wouldn't let me because they are totally separate credit cards with different partners.

I personally would close all store credit cards, as well as any with low credit lines (less than $2000, or if you have a bunch of credit cards, less than $5000) or that have been open for a short amount of time (less than 2-3 years). I have credit cards I almost never use that have been open for over 10 years, some of which have $20,000 credit limits. I'll probably have these a very long time, unless the company closes them for lack of use. Just check your credit score at least once a year to keep tabs on them. If you are really concerned, you could close the lower-balance cards, and then call to ask to have the credit limit increased on the ones you're keeping to make up at least part of the difference.

Finally, if you're not going to need credit for awhile (ie: you just bought a house, or you already bought one you are going to be in for awhile, and you're not buying a car on credit in the next year), you could close all of them except the best one or two -- the ones that have been open a significant amount of time and/or the ones with the highest limits.

"If you're not taking out loans, then your credit score might not be that important."

With all due respect, your credit score is always important. Insurance companies pull an "insurance score" annually, and this score is losely based on your credit score.

If you want to close any accounts, I would do it slowly. Close one and lock the others away; repeat after a few months.

As a side note, I was suprised how "short" your history can be to have a good score. My oldest card is 8 years old, while my husband's is about 4 - and we have about the same scores. It probably helps that we don't carry a balance, and pay the bill in full each month.

[Ken at The New Green Deal]

Oh here is some info.

First all of them should read this.

http://www.myfico.com/crediteducation/whatsinyourscore.aspx

Basically your credit score is as follows.

35% Payment History
30% Amounts owed
15% Length of history
10% Types of Credit
10% New Credit

So the big things are to pay on time and owe as little as possible.

Person #1
So i take it you are past or going to go past the 1 year free annual fee. If so call and see if you can have it waived. Explain that you are going to transfer your balance and cancel the account if they don't. They might end up waiving it for another year.

Then depending on your interest rate. If you don't have special promotion, like say 0% on the Delta card, it will be worth while to transfer your debt if you open Blue. You might be paying 20% to Delta card, you could open Blue, transfer your balance, then get 5% for life of balance, and pay an additional 3% in transfer fees. Still cheaper than 20% by far.

Although watch out if you charge anything new to it before paying off the balance transfer. Things get complicated. You might end up paying off the lowest interest first, which is bad. You always want to pay off the highest interest first, no matter the dollar amount. Basically if you get Blue and transfer a balance, you do not want to use it until you pay off that balance transfer.

Then once all that is done, if Delta hasn't waived the fee, cancel the card.

Couple #2
Above I broke out how the score is calculated. I assume you have some other cards as well that you use regularly, but do you carry a balance on them???

Since you carry no balance on the unused cards, that's good. But what you need to keep in mind is the used/available ratio. Mark, the first reply, gave a good explanation on this. This is one way closing a card can impact your score negatively. It's better to have more credit available that you don't use, than using all your available credit. So here it is good to keep cards with no balance that you don't use.

Next is Length of History. Basically they look at the average length of you credit history. So if these cards that you don't use are all 10+ years old and the ones that use are only a couple years old, you credit history has an average age that is high (a good thing). Now if you close all the 10+ year old cards and only keep the new ones, you average will now be very new (not so good, but not the end of the world). So here again it is better to keep around the cards you don't use, but in this case the older the better. If you have a bunch of new cards you don’t use, and regularly use some old cards, you could likely close the new cards and not see much of a change in score due to length of history, it might even go up (although it could impact, use/available ratio and cause it to go down)

Also if you aren't using the card and they do not charge an annual fee, you can keep it open. If they charge an annual fee, close the card.

Your payment history from the card will always be on the credit report. So by closing a card it won't really change any impact in that regard.

It will also have no to very little impact on types of credit, and no impact to new credit aspect of your score.

Couple #3
Basically the same as my answer for #2.

In brief, if they do not charge an annual fee, its better to keep them open and not use them.

[Richard]

>> I recommend only canceling cards in two situations:
>> 1) You can't control your spending. It sounds like you don't have this problem.
>> 2) You simply can't keep track of the cards you have open, and that makes you
>> uncomfortable. Response to "Too many credit cards":

I'd add one more reason. If you don't trust the bank/issuer to not change the terms on you without notice.

As soon as we've got our mortgage we'll close the Credit Card we have with Wells Fargo. Every six months or so they send out a 'change of terms' email. I hate to think that they could start charging an annual fee or something without me signing to the agreement, but I wouldn't put it past them, and if I happened to miss that email...

[Emily]

You need to keep your credit to debit ratio high. Canceling all your cards at once is the dumbest thing you can do to your credit score. Leave at least a few lines of credit open, even if you don't use them. If you remove all those, especially if they are your longest lines of credit history, your credit score will be slammed. We recently wrote an article on canceling cards wisely, which might help: http://www.creditcards.com/credit-card-news/cancel-a-credit-card-1267.php

[Steph]

I'm in agreement that the credit score is insanely important, especially for anyone carrying a balance on any type of debt load. This score is the main indicator regarding what type of interest rate you land for any debt you may incur. The better your score, the more of those cool offers you get, etc. As far as the debt-credit ratio is concerned, lower is better, as you want more open credit than debt.

Scenario 1: You would have to better define what your spending habits are. Do you use the Delta card as a way to charge bills and pay off monthly to reap the benefits of the reward program, or has that balance been sitting there for awhile being paid down slowly? Assuming that this is the only card, you'd probably want to go ahead and apply for the Amex Blue. If you're planning to use the card for month to month purchases, you don't want to transfer a balance because you'll get hammered in interest before the transfer rate expires. If it's a cold balance, then you'd want to try to transfer it. If this is your only card, and the balance is close to your limit, it may actually help your credit score in the long run by improving the debt-credit ratio.

Scenario 2: Yes. The best thing to do would be to take the cards, toss them and the card agreements in pretty file folders, and store them away. That way, you're not tempted to use them, and if some major unforeseen issue comes up that requires you to blow your emergency fund, then you have some padding. If you have other cards with balances, each card you cancel will raise your debt-credit ratio and thus will lower your credit score. If you're rather insistent that the cards have to go, then cancel them one by one, and leave at least 6 months between and check your credit to see how it has been affected.

Scenario 3: I'd give the same advice as I gave above: pretty file folders. The only difference I'll make is that if you desperately feel the need to cancel cards, then cancel the newest cards first. I'm going to assume that with 130K worth of debt, all you credit limits will be fairly high to sustain that sort of thing.

Personally, I have 1 credit card that I use and pay off monthly (Amex Blue), I have a Visa tied into my car insurance company that I use when a place doesn't take Amex, and I have about 7 or 8 other cards filed away that I don't touch. I have about 100K worth of credit limit. As long as you know you won't touch the cards (In my case, I don't even get them turned on when new ones come in the mail), then keep them. The more credit limit you have, the lower the debt-credit ratio and the better off your score will be as a result.

[CBaker]

I'm the person behind scenario #3 above. Just wanted to clear up: Steph, we don't have $130,000 in credit card debt. We have $130,000 of credit. We have recently paid off our credit card debt, so we are carrying no balances on any of our credit cards.

[Steph]

Ahh okay...just re-read and noticed it was 50K total...even then, you'd have to have some fairly high balances on your cards to sustain that sort of limit...if I had to guess, I'd say that most of your cards probably have at least 5K or more as a credit limit?

[Todd]

I'll echo what FMF said, to wit: If you pay your bills on time and pay off your credit card balances every month, you'll have a great credit score no matter whether you have 1 credit card or 20, etc., etc.

So I don't think it's worth worrying about whether you should keep a card open or open more cards and the like, because if you pay your bills on time and don't carry debt it won't make any difference at all.

[Start-Up]

It has been mentioned numerous times so far that it doesn't really matter how many cards you have as long as you pay them off in full every month, or at least pay the minimum required. Credit scores do take into account a debt to credit limit ratio so more cards to increase your credit limit is not a bad thing. One very important reminder is to continue to check your accounts for balances even if you aren't using them.

[Valerie]

I just wanted to thank everyone for the advice! I am the user in scenario 1 and I think I will be calling AmEx to transfer the balance from the Delta card to a new Blue Cash card, keeping both open for a little bit. I have not charged anything new, so all I am doing is paying down the debt, which is now $1550 and will be cleared by December ($400/month plus snowball from sales on Half.com). The 0% helps, even though the interest on the debt would only have been about $40.

[Sheryl]

I've been reading all these comments and wonder if you can comment on my situation. I had 36,000 credit limit on a card, with 11,400 cash advance. I wanted to reduce this down to 15,000 credit. The card company by mistake reduced my cash advance to 0, even though I did not request that. When I discovered it, and called to have it put back to 2,000, they did a hard hit on my credit report, declined the 2K, and said I had "too much available credit" "too many open lines of credit" to give me 2,000 back! I immediately checked my score and it is over 900! I do have over 75,000 in open credit and I don't carry a balance on any of it! So is it hurting me to have this much available credit? According to them it does! Please advise.