You know you have a lot of credit cards when new cards show up in your mailbox for an account you don’t remember opening.
I’m a gal drawn to rich credit card rewards and have been since the age of 16, when my Dad added me to his WorldPerks Visa. If I see a better deal, I apply for a new card. The result is a menagerie of credit cards that I rarely use.
My credit score is good, so that’s not a concern. But I do wonder from time to time if I could close some of my cards without hurting my score. It would be nice not to have to refill the printer to print out my credit report.
Call it the urge to spring clean my credit.
The question of when and how to close credit card accounts is a common reader query. So I asked the experts: “How can I close credit card accounts without harming my credit score? And should I even bother?’’
The unanimous response was that there’s no pressing reason to close my unused credit card accounts unless I’m afraid of fraud or fear that I’ll go on a shopping bender.
Those reasons aren’t terribly convincing, said John Ulzheimer, president of consumer education for CreditSesame.com.
“People who manage credit properly tend to always manage credit properly. Even if someone did steal your purse, your [credit card] liability is zero,” he explained, referring to banks’ zero-liability protection policies.
Sarah Davies, senior vice president of analytics for VantageScore, takes a big-picture approach to credit scores. “If you spend time getting the right disciplines in place, you will never need to worry about whether you go up or down 5 points, 10 points or 50 points. It’s a healthier way to look at financial management and how your credit score is going to behave,” she said. Healthier, but not terribly aligned with our quantified-self society.
Still, Davies is right. Improved habits — paying off credit card balances each month and being careful about taking on too much debt — will result in an improved score.
Credit scores are derived using complicated algorithms that take into account several metrics. One of the key considerations is credit utilization. “The score does not care how much credit you have; it cares about how you utilize it,” said FICO Score spokesman Anthony Sprauve. Use no more than 30 percent of your available credit at a time, experts say. Some score-watchers aim for 10 percent utilization.
Since I have so much available credit, my utilization ratio is in the single digits. That’s a key explanation for why my score is high.
Sprauve suggests listing all of my cards, their credit limits, whether the cards have annual fees, their notable benefits such as no foreign transaction fees and the richness of rewards.
Balance-carrying credit card users should consider interest rates above rewards and other benefits. As a general rule, interest rates on rewards cards are higher.
Using my list, I’d identify the cards with the lowest credit limits and jettison those first. Some score providers may choose to look at utilization per card rather than overall utilization, which means a small purchase could raise the utilization ratio through the roof if the limit is ultralow.
Length of credit history is another factor that goes into credit score calculation, which is why I plan to keep my card formerly known as my WorldPerks Visa card open. There’s the debate about whether this is necessary. “When it comes to credit scores and reports there are very few things that are black and white,” Sprauve said. (And that’s coming from the spokesman of the company that invented credit scoring.)
Some credit card providers may stop reporting a closed card after a period of time while others may list that card on your report for eternity. I plan to keep it open just to be safe. Ulzheimer said I might be surprised to learn that issuers closed some of my dormant cards without my knowledge. The Equal Credit Opportunity Act does not require companies to give notice to consumers before canceling cards for inactivity.
To close a card, check with your card provider. Some may want a written note (and you may want it in writing for your records). Others are fine with a phone call.
Before deciding to close some cards, I’d like to know the hit my score would take. Unfortunately, it’s not that easy. There is a FICO score estimator app that gauges my current score for free at whatsmyscore.org. But to simulate the effect certain actions would have on my score, I’d have to purchase a score simulator for around $20 at a credit bureau such as Equifax.
I’ll stick with research conducted in 2012 by VantageScore, which found the maximum impact of closing a credit account would be a 30 point drop out of 850 possible points. That’s reassuring.
So do the experts think I should close a card or two?
“If the card isn’t charging you an annual fee, throw it in the drawer and don’t think about it,” said Anthony.
“If you’re contemplating taking out a mortgage loan, I would leave well enough alone. If you’ve got really solid credit scores, wait until you close on the loan and get keys to the house,” Ulzheimer said.
Everyone who knows me knows that I’m always contemplating moving, so maybe I should hold off.