You want to apply for a mortgage and don’t want a lot of credit card accounts just sitting on your credit report because you think it is going to hurt your FICO score. You think you can raise your score just by closing your accounts and you close a few. Guess what? The opposite happens and your FICO score goes down. Why is that?
The first reason is your FICO score judges you on the age of your accounts. This makes up to 15% of your total score. To determine the scoring, the age of your oldest account is looked at as well as the average age of your accounts. If you close those accounts you run the risk of skewing the average age. Even worse, not knowing which is the oldest account and then close that one. This will also have the most determent to your average account age.
The second reason why this hurts your FICO score is based on how much you owe. This makes up to 30% of your FICO score. It takes into account your utilization which is the total amount that you owe divided by your credit limits. The lower the utilization the better for your FICO score. It is better explained with an example of three credit cards. The first credit card has a balance of $2000 with a credit limit of $5000. The second credit card has a zero balance with a credit limit of $4000. The third credit card has a balance of $3000 and a credit limit of $6000. This gives you utilization of 33%. You then go and close that second credit card with a zero balance. Your utilization is now 45%. Your utilization is now higher and this will hurt your FICO score.
There are times when closing accounts is the right thing to do. If you can’t control yourself and spending it to much of a temptation, closing an account is the correct thing to do. Also, if you have a card with an annual fee and you don’t want to pay that, you could close the account.
If you are trying to improve your score, you should be careful of the ones you close. As said before, closing your oldest account can really hurt. You should try to keep the accounts till you can raise your FICO score into the high 700’s and then look at the ones you want to close.
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