Question about FICO score and open accounts

[glock35ipsc]

I have a FICO question that concerns paying off our consumer debt.

I have always heard that even if you pay off all your credit cards, you should leave one or two open so you will show a good credit to debt ratio (high credit limit vs. low balance).

My question is: Is there any reason to keep an unused, paid off credit card account open to keep my FICO score up? Will it have a big impact on my FICO score if I close them all, and should I care if I have no need for a loan?

Thanks!
Bob

[disneysteve]

Yes, closing cards can lower your score for a few reasons. As you mentioned, the utilization ratio is a factor. Also, the average age of accounts is a factor, so if you close an account that you've had for a while, it shortens the average age which drops your score.

Should you care if you have no need for a loan? Absolutely. Your FICO score is used for other things, like getting a job, getting preferred insurance rates, renting an apartment, etc. Plus, you never know when something may come up and you find you do want a loan. Perhaps you decide to move or finance a vehicle or take out a HELOC to remodel your house. Having a good FICO is always a good idea.

[glock35ipsc]

OK, thanks Steve. I wanted to be sure before I did anything. I guess I'll keep the oldest two open and just get rid of the cards themselves.

[Seeker]

Yup. Just lock up the CCs you don't use. They may send you more cards with updated expiration dates.

And also, they may close your account. Many CC companies are looking at non-used accounts; especially now. Some companies are closing accounts that have gone unused and providing the explanation "closed for inactivity."

This will harm your FICO if they close your account and you don't have any other active accounts.

In reality, there's really no harm in using them for the necessities you will purchase anyway. Just pay-in-full each and every month and your FICO will be fine.

[Exile]

Yes, closing cards can lower your score for a few reasons. As you mentioned, the utilization ratio is a factor. Also, the average age of accounts is a factor, so if you close an account that you've had for a while, it shortens the average age which drops your score.

Should you care if you have no need for a loan? Absolutely. Your FICO score is used for other things, like getting a job, getting preferred insurance rates, renting an apartment, etc. Plus, you never know when something may come up and you find you do want a loan. Perhaps you decide to move or finance a vehicle or take out a HELOC to remodel your house. Having a good FICO is always a good idea.

As a retired bill collector, I would say that disneysteve is right on the money on this one. But it's sad that as consumers we are in effect being held hostage to keeping accounts open with companies with which we may have had a bad experience and with whom we no longer want to do business. In order to to protect our FICO score we can no longer have the satisfaction of telling them that we will never do business with them again and (the ultimate leverage that sometime gets a problem solved) to close our our account.

[Like2Plan]

Yup. Just lock up the CCs you don't use. They may send you more cards with updated expiration dates.

And also, they may close your account. Many CC companies are looking at non-used accounts; especially now. Some companies are closing accounts that have gone unused and providing the explanation "closed for inactivity."

This will harm your FICO if they close your account and you don't have any other active accounts.

In reality, there's really no harm in using them for the necessities you will purchase anyway. Just pay-in-full each and every month and your FICO will be fine.

With this in mind, wouldn't it be more beneficial if you closed the CC account yourself before they did?

[Like2Plan]

As a retired bill collector, I would say that disneysteve is right on the money on this one. But it's sad that as consumers we are in effect being held hostage to keeping accounts open with companies with which we may have had a bad experience and with whom we no longer want to do business. In order to to protect our FICO score we can no longer have the satisfaction of telling them that we will never do business with them again and (the ultimate leverage that sometime gets a problem solved) to close our our account.

Exile,
I'm just pulling out some random numbers in terms of the number of CC's, but if you don't use any of your CC's, wouldn't your (zero) % credit utilization remain the same whether you had 3 or 10 CC's ?

If you had 10 CC's vrs 3, wouldn't that work against you, too, in terms of your available credit might be too high?

If you have held a couple of CC's for 20 years or more, at what point do you max out on the points for that category where it wouldn't really matter whether you closed out a newly acquired CC?

Here's another question I don't know the answer to, but was curious from your standpoint--how many CC's is the right amount if you are only using them to protect your FICO?

[disneysteve]

Also folks, keep in mind that your FICO score is a moving target. It goes up and down almost daily based on your financial life. Yes, your score will drop a bit when you close a card, but only temporarily. The effect of any negative information diminishes over time and your score comes back up. So the time to do things like close accounts is when you have no immediate plans to need that FICO, not a month before you apply for a mortgage.

[Exile]

Exile,
I'm just pulling out some random numbers in terms of the number of CC's, but if you don't use any of your CC's, wouldn't your (zero) % credit utilization remain the same whether you had 3 or 10 CC's ?

If you had 10 CC's vrs 3, wouldn't that work against you, too, in terms of your available credit might be too high?

If you have held a couple of CC's for 20 years or more, at what point do you max out on the points for that category where it wouldn't really matter whether you closed out a newly acquired CC?

Here's another question I don't know the answer to, but was curious from your standpoint--how many CC's is the right amount if you are only using them to protect your FICO?

LIke2Plan, yours is a complex question. Based on my personal and professional experience, here are some attempted answers: It's true that whether you have 3 or 10 cards with 0 balances and open credit lines (in good standing), your credit utilization remains the same. But there is no set number of cards or accounts that will determine your score. Rather it's the ratio of your total credit lines (credit available) vs. the total amount that you owe that helps determine your score. For example if you have (any number of) accounts with a combined total of $20,000 in open credit lines in good standing, and your combined indebtedness for these accounts is $4,000, then your FICO score will be determined by the fact that you've used %20 of all your available credit.

Now what if you've maxed out any of your individual accounts in the above scenario? For example, if one your accounts comprising the above $20,000in open credit lines has a limit of $1,000 and you owe $1000, on that account, does this affect your FICO? I don't think so, especially if you have several other accounts with 0 or small balances owing on them. In this situation, having more than just a few accounts in your credit profile can work to your advantage, but again there is no fixed quantity.

I believe that the length of time that you've had an account also a factor in determining your FICO, but I don't know the formula.

Finally, Like2Plan, please click on "Secrets of Your Credit Score" by The Motley Fool for further advice on this topic.

I hope that this long-winded reply has been helpful.