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Topics addressed on March 18, 2009:
Rumor to leave accounts open is correct
My husband and I have several credit cards, all with limits under $1,500.00. We wanted to pay off and close the high-rate cards we don't use, because we were told by a car dealer that even if the card with a high balance is paid to a zero balance, the fact that it is still open and "available" credit for using will hurt our scores. On the contrary, I have heard a rumor that closing a credit card looks bad. What's the truth in this?
Usually I advise people to be wary of rumors, but in this case, the rumor is right. Closing the accounts likely would have a greater negative impact on your credit scores than leaving them open.
In the distant past, the car dealer would have been correct. Unused available balances used to signal high risk because you could suddenly make large purchases, causing you to take on significantly more debt that you could not repay.
However, that has changed as the credit market has evolved. Today, the more significant issue is your utilization rate, which is simply how much of your total available credit limits you have used.
Closing the accounts would eliminate those available limits, making it seem your total balances are a greater percentage of your total limits. That ratio is your utilization rate. The higher the utilization rate the greater the lending risk.
Keep in mind that this is just a guideline, and you have to apply such guidelines to your own unique situation. The goal is to keep some revolving accounts, use them to demonstrate that you can manage credit, and keep your utilization ratio low.
If you have extra accounts and want to close some to simplify your credit life, then don’t feel obsessive about following a rule. Just don’t make such changes immediately before applying for new credit. You want everything to be stable.
It sounds as if you are doing all the right things in paying down your balances so that you aren’t carrying expensive debt. Keep up the good work.
Thanks for asking.
- The "Ask Experian" team