Closing Down Old Credit Cards Don’t Affect FICO Score
Watching their FICO score might soon become a national past time for American consumers. With the economy far from recovering and credit cards getting more and more expensive to keep, every consumer with credit cards in their wallet are rethinking the way their credit card habits.
As consumers find themselves getting squeezed financially, many are finding out that the practice of keeping multiple credit cards is no longer a smart move. A lot of credit card holders are now looking into canceling some, if not all of their credit cards to avoid their high costs which include fees and interest rates. However, a lot of these credit card holders are worried about the effect that canceling their credit cards will have on their FICO credit scores.
Most American consumers know how important a good FICO score is. In essence, a consumer’s FICO score is a measure of how much of a risk he is to a lender. A lower score means higher risk and vice versa. FICO scores are very important for American consumers. They usually determine how easily a consumer can take advantage of services being offered by lenders. A higher FICO score usually means an easier time for a consumer to get a loan, a mortgage, a credit card application approval and others. It is therefore quite easy to see why any American credit card holder would have reservations about canceling their old credit cards for fear of ruining their FICO score.
The good news is that canceling old credit cards will not have any impact on the length of a consumer’s credit history. A consumer’s FICO score takes into account both open accounts and closed accounts. Closed accounts are calculated in a consumer’s FICO score for up to ten years. For consumers who maintained a good debt payment record, this will have a positive impact on their FICO score for the long term. Conversely, a consumer with a bad debt payment record will also be seeing the negative results for quite a while.
While closing an old credit card will not have a negative effect on a consumer’s credit score, it is still important to note that closing a credit card, regardless if its new or old, will still have a negative effect on the FICO score of a consumer if he or she has a bad utilization ratio. The utilization ratio of a credit card is the percentage of the credit limit that the consumer has used. Basically, the closer the debts are to the credit limit, the higher is the utilization ratio which is bad for a consumer’s FICO score
Logically, canceling a credit card will cut down available credit which makes the utilization ratio go higher. It is therefore wise to pay off existing debts as much as possible before canceling credit cards.
