Q. I have a good credit score of above 800. I’m thinking of canceling some credit cards I never use, but I know that can hurt my credit score. How much would it hurt?
A. Congratulations on having an excellent credit score.
A score of 800+ will virtually guarantee approval when applying for credit and will likely secure you the lowest available interest rates.
Your question on what to do with old, seldom-used credit cards is a common one, said Michael Ciccone, a certified financial planner with Tradition Capital Management in Summit.
He said there are a number of factors that could go into your decision to keep or cancel them.
But before we get there, it’s worth taking a second to review the factors that go into creating your credit score.
Ciccone said there are five main factors that influence your credit score. For your FICO score, the most commonly used credit score, 35 percent of the score is based on your payment history, 30 percent on the amounts owed, 5 percent on your length of credit history, 10 percent on new credit and 10 percent on your credit mix.
Your question about cancelling unused credit cards touches on two areas: your length of credit history and your credit utilization ratio.
“You didn’t mention how long you had held the cards in question but, depending on the age of the accounts, cancelling them could shorten the length of your credit history, Ciccone said, noting that closed accounts with positive info will stay on your credit report for up to a decade, so it may not be a major factor.
A potentially more important factor is your credit utilization ratio, which is a measure of the percentage of a consumer’s available credit that is being used. In other words, it’s your average total balances divided by your total credit limits.
“Closing unused accounts will lower your total credit limit while keeping your average balances the same, increasing your credit utilization ratio, which is a negative factor for your credit score,” Ciccone said. “Cards with higher credit limits will have a greater effect on your ratio than cards with lower limits.”
You didn’t mention why it was that you wanted to cancel these cards.
Ciccone said if the reason is because you are being charged an annual fee for a credit card you never use, you may have another option.
“Many credit card companies will give you the option to convert your existing annual fee card to different card they offer that doesn’t have an annual fee,” he said. “Converting your card via this method will avoid seeing the account closed, eliminate the annual fee, and can be done without generating a new `hard pull’ on your credit report.”
Most companies will also refund your annual fees – either in full or in part – when cancelling or converting the card, he said.
Finally, you asked “how much” canceling the cards would affect your credit score. It would depend on the specific make-up of your credit history and the details of the actual cards in question.
Furthermore, Ciccone said, credit scores are calculated based on proprietary scoring models rather than a specific, open-source, formula.
“That said, websites such as CreditKarma.com will not only provide you with your current credit score for free – but they also have a `Credit Score Simulator’ that allows you to estimate the impact of certain events on your credit score – such as the effect of `Closing My Oldest Card.’”
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