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FICO Score Question
Old 10-23-2008, 06:32 AM   #1
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FICO Score Question

I am helping a young couple put together a budget. One of the first things on hand is to have them pay down and pay off their credit card debt. They currently have four credit cards and balances on each. I have encouraged them to pay off the cards and cancel all but one card and to only use that one card and to pay the bill in whole each month so they aren't paying credit card interest.

They said they had heard that even if you pay off your balance and then cancel the card it will hurt their FICO score.

Anyone know if this is true ?

Thanks in advance for any and all replies.
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Old 10-23-2008, 06:45 AM   #2
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It's always been my understanding you should not close your credit card accounts...

How Does My Credit Score Change If I Open or Close Credit Accounts? - BrightScore

Btw, I have old credit cards still open that I haven't used in a long time and don't plan on using. My FICO score is 813.
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Old 10-23-2008, 06:52 AM   #3
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It's always been my understanding you should not close your credit card accounts...
That's my understanding too. They look at how much of available credit is used on each account. So if they have one cc with a $5k limit with a $2,500 balance they've used 50% of the available credit on it - not bad, but not good either. If they have another cc with a $20k limit and also have a $2,500 balance, they've only used 12.5% of the available credit.

For some reason the latter is deemed to be "better". Doesn't make any sense to me though.:confused:
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Old 10-23-2008, 07:11 AM   #4
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According to the link I provided....
Looks like it's all about the ratio.

2. Amounts owed
Large account balances may be another negative. What is the balance on each of your credit obligations? How many accounts have balances? Are you “maxed out” or nearly so on your credit cards regardless of the dollar amount? Credit scores are negatively affected if you have a balance on any card in excess of thirty percent of the credit limit on that card.
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Old 10-23-2008, 07:45 AM   #5
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How about putting the forbidden cards offsite in a safe deposit box? Or if not available,
duct tape the forbidden cards together w/ 100+ wraps to remove the immediate temptation to use them. Or both.
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Old 10-23-2008, 08:14 AM   #6
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Keep in mind also that not using a card for a long time can lead to the issuer canceling them anyway. I have one card with a $19,000 credit limit, open since 1990, which I hardly ever use. Having this card helps my score in several different ways, so I make sure I put a small charge on it about once every 3-6 months to keep it active.
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Old 10-23-2008, 08:32 AM   #7
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Keep in mind also that not using a card for a long time can lead to the issuer canceling them anyway. I have one card with a $19,000 credit limit, open since 1990, which I hardly ever use. Having this card helps my score in several different ways, so I make sure I put a small charge on it about once every 3-6 months to keep it active.

I had a funny experience. I had a credit card in college with a $1000 limit or something small. Interest rate of 19.99% or some rediculous rate. Seldom used/need it, never carried a balance. Once I had graduated, got a job, etc., I had several other cards with higher limits and lower rates. I called to cancel the "junk" card. They basically refused, I got the "I'll let you speak to my manager" runaround, put on hold, etc.

Never used the card again. 6 years later, they decided to cancel it. I tried.

Maybe it negatively affected my credit a few points, but my score is still over 800.

-CC
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Old 10-23-2008, 10:09 AM   #8
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I still have the first CC I ever was issued....over 20 years ago. I haven't used it in 12-15 years, yet every once in a while they send me a notice that they've increased my limit...again. According to what I've read at MyFICO.com as well as other places, it's recommended that you keep your oldest accounts open (if possible), because that helps establish that you have a long credit history....which is a major positive when it comes to credit scores.

Also, as I understand from what I've read, not only is the ratio of credit balance to credit limit on any particular card a piece of the credit score puzzle....they also use total credit balance on ALL accounts combined compared to total credit limits on ALL accounts combined as well. IOW, like Walt said, "if they have one cc with a $5k limit with a $2,500 balance they've used 50% of the available credit on it - not bad, but not good either" However, if you have 2 CC's each with $5000 limit, and you have that $2500 balance on only the one CC, you're carrying a balance of (only ) 25% of your total credit available. So the higher your total combined CC limits, the lower your percentage of available credit used (still assuming here the $2500 balance on the CC as you originally mentioned).

This is from the MyFICO website:

Quote:
FICO® scores are calculated based on your rating in five general categories:

* Payment history - 35%
* Amounts owed - 30%
* Length of credit history - 15%
* New credit - 10%
* Types of credit used - 10%
Hope that helps a little.
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Edited to add:
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Originally Posted by kaneohe View Post
How about putting the forbidden cards offsite in a safe deposit box?
That's a very good recommendation! The other cards are still available if ever needed for an emergency, etc.....but they aren't readily available for whims or last minute spending sprees. I have a big ol' safe that I keep all my CC's in except for my bank credit/debit card and the one rewards card that I use AND payoff monthly. When I go on an extended vacation, I usually grab one of the other cards out of the safe to take with me 'just in case' it's needed. (so far after many years, I've NEVER had to use the 'just in case' card! ) I keep all of the other CC's (that are in the safe) open merely for the credit history that they represent, and for the total combined credit limit that they provide......also they are there if I ever actually need them in a real emergency.
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Old 10-23-2008, 10:23 AM   #9
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I kept my oldest card open, but cut up the card I had and any new ones they mail me. I do have a newer one (PenFed--thanks to this crowd) that I use regularly.
Even not carrying any debt at all (no mortgage), my FICO score is still 830. I also have an unused HELOC.
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Old 10-23-2008, 11:13 AM   #10
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Thanks all I have what I need.
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Old 10-23-2008, 11:40 AM   #11
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But also keep in mind that the more credit card accounts you have floating around out there, the greater the odds that one of them will be hacked/stolen. Especially if it's one you don't keep tabs on, or haven't updated your contact address with the issuer, it could be a hassle to sort out the identity theft once discovered.

For this reason, I keep my accounts at a minimum, and have closed all but 1 Visa card and 1 AMEX card. I use them very frequently but never carry a balance, and they both have continued to increase my credit. My FICO score is high and I don't think closing my accounts made any difference, at least not enough to counter the responsible use of the cards I did keep.
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Old 10-23-2008, 11:45 AM   #12
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But also keep in mind that the more credit card accounts you have floating around out there, the greater the odds that one of them will be hacked/stolen. Especially if it's one you don't keep tabs on, or haven't updated your contact address with the issuer, it could be a hassle to sort out the identity theft once discovered.

For this reason, I keep my accounts at a minimum, and have closed all but 1 Visa card and 1 AMEX card. I use them very frequently but never carry a balance, and they both have continued to increase my credit. My FICO score is high and I don't think closing my accounts made any difference, at least not enough to counter the responsible use of the cards I did keep.

Excellent point !
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Old 10-26-2008, 10:48 PM   #13
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I just got a notice from Citicard that one of our old credit cards will be closed for inactivity if we don't use it soon. I knew about how the unused credit impacts the FICO score so I dug out the old card, I'll activate it and use it once just to keep it open for the FICO effect.

I don't remember the size of the credit limit on this one, it was only used for a limited time for a 0% intro rate.
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Old 10-26-2008, 11:12 PM   #14
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But also keep in mind that the more credit card accounts you have floating around out there, the greater the odds that one of them will be hacked/stolen. Especially if it's one you don't keep tabs on, or haven't updated your contact address with the issuer, it could be a hassle to sort out the identity theft once discovered.

For this reason, I keep my accounts at a minimum, and have closed all but 1 Visa card and 1 AMEX card. I use them very frequently but never carry a balance, and they both have continued to increase my credit. My FICO score is high and I don't think closing my accounts made any difference, at least not enough to counter the responsible use of the cards I did keep.
Not really. If you have the account open but unused, how is it going to be accessed? They don't even mail you a statement. The huge majority of identity thefts are based on stealing your SSN, then applying for credit in your name but not sending the bill to your address. Most CC fraud is either from hacking a company's servers, or stealing the number from personal use of the card (like in a restaurant). As far as I know, nobody has ever stolen a CC number through an encrypted secure transaction.

Personally, for the cards I don't use, I cut up the card whenever they send a new one (every 3-5 years). However, my favorite way of not using a card while still having access to it is freezing it in a block of ice and keeping it in your freezer.
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Old 10-26-2008, 11:17 PM   #15
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This is where I usually comment about Fico and credit scoring in general being a scam, but since that's really not constructive, let me try something else.....I agree it's better to keep the line open. I recently closed a credit monitoring subscription that had a narative analysis of my three-bureau report. One of the comments I recall said something like "an avg credit history (i.e. length of time a particular account is open) of THIRTY YEARS is optimal.

As the formulae of credit scoring become known, it influences behaviour, which de-values the methodology. In general, I would think paying down the card would increase FICO, but canceling the accounts would <somewhat> offset the increase. Hopefully, they have the discipline to just not use the card or destroy it so they would have to request a replacement or call customer service to use the account.
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Old 10-27-2008, 09:07 AM   #16
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I let my credit cards expire and then cut them up. I had some credit card problems in my early twenties and 5-figure cc debt runs in my family so I don't even own one anymore. Even without that available credit, I still have a FICO of between 795 and 801 depending on which of the 3 agencies you use. I don't plan to ever use credit again for anything so I guess my FICO doesn't matter much.
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Old 10-27-2008, 09:54 AM   #17
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I let my credit cards expire and then cut them up. I had some credit card problems in my early twenties and 5-figure cc debt runs in my family so I don't even own one anymore. Even without that available credit, I still have a FICO of between 795 and 801 depending on which of the 3 agencies you use. I don't plan to ever use credit again for anything so I guess my FICO doesn't matter much.
What about a house? Are you going to pay cash for one? Hey, more power to ya........
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Old 10-27-2008, 11:45 AM   #18
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We charge everything to our Pen Fed card. Why not get 5% back for gas and the other % returns on purchases? Long as you pay it off every month its free money. We put 7 k on our car. Would have done the whole thing but the dealer only let us use 7k :P
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Old 10-27-2008, 12:03 PM   #19
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What about a house? Are you going to pay cash for one? Hey, more power to ya........
I can relate to Aaron's point of view.

The only credit I've used since my 1998 divorce was a mortgage that I got in 2002. I've since paid it off, and I owe nothing to anybody. I don't ever intend to have another mortgage.

My credit scores were in the low 800's last year. I haven't checked them this year. Other than their effect on lowering my insurance rates, I don't think they make much difference to me now.
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Old 10-27-2008, 12:46 PM   #20
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I was using the penfed as Notmuchlonger described, right up until I noticed a bit of a propensity to eat out more than usual because it wasn't coming out of the checking account like when we use the debit card.

I'd like to think that I was smart enough to not spend more on the credit card but I'm afraid I'm not able to overcome the "spender within". Darn behavioral economics!

But I do use the penfed for online purchases and LOVE the cash back feature.

You and me both, Want2--I am thrilled to drive past the bank that USED to carry our mortgage!
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