Thread: Should we cancel this credit card?

Good question. You don't want too much available credit but at the same time you want a low ratio of balance carried to available credit. So... if he has two cards with $1000 total limit between the two that's probably not too bad as long as the balance stays below 50% (the golden number). You probably want to get your card paid down below 50% balance as soon as you can, too. And of course most importantly make all payments on time!

Originally Posted by willow12

My boyfriend is building his credit and currently has one auto loan, one department store card & one real credit card (current bal. $50, limit $500, 14%). He is also an authorized user of my credit card (bal. $600, limit $1000). We just got another card for him with zero interest, $500 limit. We are going to pay off the other card with the $50 bal. but should we CANCEL it or keep it ACTIVE and not use it?? What would be best for his score? Does he already have too much revolving credit? Any advice is appreciated. Thanks so much in advance

The more available credit you have the better! It's usually better to keep your cards open but if you insist on closing one or some please read below.

CLOSING CREDIT CARDS

THE FACTS

Closing a CC (credit cards) does not lower your FICO scores in and of itself. When deciding to close a CC there is two important things to consider. In the short-term, closing a CC can have adverse effects on your UTIL percentage calculations and this in itself can definitely lower your scores. In the long-term, a closed CC in good standing (nothing derogatory reporting) with a $0 balance will generally be deleted from your CRs (credit reports) after 10 years. Once this account is deleted, you lose the history and age and this might lower your scores.

SHORT-TERM

The most important factor to consider when closing CCs is the effect on your cumulative UTIL percentage calculation; this is the total sum of all of your CC’s CLs (credit card limits) divided by the sum of their balances.

Utilization Percentages

To fully understand what Utilization percentages are, you must know FICO scoring has two types of util percentage calculations, one that looks at the extent of utilization on individual revolving accounts (i.e. CCs, overdraft protection and sometimes Heloc’s) and the other is cumulative and looks at the extent of utilization on all of your revolving accounts.

Example

Card 1: CL 5K, balance 1K = 20 percent util

Card 2: CL 3K, balance 800 =27 percent util

Card 3: CL 2K, balance 100 = 5 percent util

Add all three together and the cumulative UTIL is 19 percent. Not bad but again not ideal.

Let's see what happens if you close one of them.

Close Card 1:

Total CL is 10K - 5K = 5K total CL

Cumulative: 5K CL, balance 1,900 = 38 percent

YIKES…Getting worse!

Closed and opened CC TLs are weighed and scored equally by FICO. You will not be punished by simply closing a CC as long as it is in good standing, has a $0 balance and your cumulative Util remains at 1-9 percent. Increasing the CLs (credit limits) on the cards you plan to keep open before you close the card(s) you don't want might be helpful as this too helps to keep your Util percentage low.

Also open and closed accounts age the same. Closing a CC has no adverse effect on average age of accounts or credit length history.

One more tidbit! Closed CC accounts with balances do factor in utilization percentage calculations whereas closed CC accounts with $0 balances do not.

LONG-TERM

In the long-term, closing a CC in good standing with a $0 balance will generally be deleted from your CR after 10 years. Once this account is deleted, if your length of credit history and/or average age of accounts decreases in the number of years, your scores might drop.

FINAL NOTES

In the short-term there should be no adverse effects to your FICO scores, average age of accounts or credit length history provided there is no increase in your util% calculations after you close any CC(s). In the long-term, a CC in good standing (nothing derogatory reporting) with a $0 balance will generally be deleted from your CRs (credit reports) after 10 years. Once this account is deleted, you lose the history and age of this TL and this might lower your scores.