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Topics addressed on July 23, 2008:
Closing accounts, applying for credit probably won’t help credit scores
Is it bad when you close out credit cards? For instance, I have about 10 credit cards that do not have balances and that I have never used. I am 24 years old, and I was told the only way to increase my credit rating was to apply for credit. My score is between 750 and 780, and I do not want my score to drop.
The standard advice today is to leave your unused accounts open.
Closing unused accounts will cause an increase in your overall balance-to-limit ratio, also referred to as your utilization rate. The utilization rate is simply your total credit limits compared to your total balances. A high utilization rate is a sign of risk, and so hurts credit scores.
Perhaps the best way to raise your score is to ask your current creditors to raise the limits on your accounts. That would lower your total utilization,which might help your score, depending on the other factors in your credit history. Your lenders typically would check your credit report, so of course, you have to have a good score before creditors would consider increasing their risk by raising your limits.
In the future you probably should not take credit advice from the source that told you applying for credit will help credit scores. In fact, the opposite is true. Applying for credit, particularly if you do so often, will hurt credit scores, not help them.
Applying for credit, especially for large numbers of accounts or in short periods of time, is a sign of risk. When you submit a number of applications in a short time it is unclear how you will manage the new debt or why you are suddenly trying to amass credit. The question in a lender’s mind in that situation is, “Are you going to suddenly run up your debts and then not be able to repay them?”
Credit scores react in the same way. It is unclear why you are trying to take on new debt or if you may be planning to run up debts you cannot afford, so your scores get worse, not better.
The best way to maintain or even improve your scores is to continue paying all of your bills on time and reduce your debts. A history of good credit management is the best indicator that you are an excellent credit risk. That will be reflected your credit scores.
Thanks for asking.
- The "Ask Experian" team