Thursday, January 18, 2007

Is Closing Your Card The Right Thing?

How many times have you spoken with a person who has climbed out of a financial hole and closed a credit card (or two) in order to increase his/her credit score? I cringe every time I hear that! In most cases it does NOT help your credit score to close off your cards.

The exact formula for determining FICO scores are kept secret but we do know that cards affect those scores and one of the criteria is utilization. In other words, if you have a credit card with a $5000 limit and you’ve charged $4500 on it, it will affect you negatively in comparison to if you’ve only charged $1000 on it. So let’s go back to the when the person is in a financial hole – it’s likely that cards were maxed out. Once the cards are paid off, the utilization is excellent as far as the FICO is concerned. But if you close off the card(s) you now no longer have an underutilized card to help raise your scores. Yet so many potential borrowers are unaware of this.

I even spoke to someone recently who had been advised by one of those ‘credit assistance’ type companies to close off a card she had just paid off. How can such a company be allowed to operate? This woman’s scores would have likely been 20-30 point higher. Please advise your potential clients who find themselves in a similar situation to merely cut their cards but not to close them. Otherwise they’re doing themselves a disservice.

- Tchaka Owen

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