Help Your Score With Closing Credit Accounts

by : John Hilaire

That statement does sound logical, especially when a mortgage broker tells you that lenders are suspicious of people who have lots of unused credit available to them. What's to keep you, after all, from rushing out and charging up a storm?

Of course, if you think about it, what's kept you from racking up big balances before now? If you've been pretty responsible with credit in the past, you're likely to continue to be pretty responsible in the future. That's the basic principle behind credit scoring: It rewards behaviors that show moderate, responsible use of credit over time, because those habits are likely to continue.

The score also punishes behavior that's not so responsible, such as applying for a bunch of credit you don't need. Many people with high credit scores find that one of the few marks against them is the number of credit accounts listed on their reports. When they go to get their credit scores, they're told that one of the reasons their score isn't even higher is that they have "too many open accounts." Many erroneously assume they can "fix" this problem by closing accounts.

But after you've opened the accounts, you've done the damage. You can't undo it by closing the account. You can, however, make matters worse. Closing accounts can hurt you in two ways:

1. Closing accounts can make your credit history look younger than it is. Your credit score factors in the age of your oldest account and the average age of all your accounts. So closing accounts, particularly older accounts, can ding your score.

2. Closing accounts reduces the credit available to you, making your debt utilization ratio soar. The "FICO" formula measures the gap between the credit you use and your total credit limits. The wider the gap, the better. If you suddenly lower that limit by shutting down accounts, the gap narrows - and that's a bad thing.

This is true whether or not you keep a balance on your credit cards or pay them off in full every month. Remember: The FICO formula doesn't differentiate between balances that are carried and those that are paid off. In reality, closing revolving credit accounts can never help your score, and it might hurt it.

There are, however, some good reasons to close accounts. If you have a serious spending problem, you might find cutting up and canceling your credit cards is the only way to keep yourself in line. If that's true, your credit score is probably the least of your worries.