23 Oct Credit score and a credit card cancellation

Q. We have had a certain credit card for more than 20 years. We don’t use its benefits anymore and we have one recurring bill charged to it each month. Our September payment was posted six days late — eight days after the money was taken from our checking account through on online payment. Would it be better not to cancel the account, but keep it and just not to use it?
— Cardholder

A. We’re guessing you’re concerned that the late payment — even though it happened under unusual circumstances — might affect your credit score.

It’s unlikely that’s happened, but closing the account could have a larger impact.

Here’s why:

A good credit rating is essential when a consumer applies for a mortgage or other form of loan, but the score can also affect costs for insurance premiums, cell phone plans and the ability to rent an apartment, said Claudia Mott, a certified financial planner with Epona Financial Solutions in Basking Ridge.

She said it’s always important to know what causes credit scores to change and how to keep them at their highest level.

Each individual’s FICO credit score is calculated based on the following five components:
Payment history: 35%
Amount owed: 30%
Length of credit history: 15%
Credit mix: 10%
New credit: 10%

You’ve kept the card alive by putting the single transaction on it each month.

“If you opt to stop using the card entirely, the issuer may have the right to close the card,” Mott said.

Each credit card comes with an agreement which details the terms, interest rates, fees, penalties and conditions which accompany ownership of the card, she said, and written in many credit card agreements is the ability for the issuer to increase or decrease a cardholder’s credit limit, revoke the card and ask for income verification to ensure that the customer is still creditworthy.

Mott said closing the card will affect your credit utilization ratio (CUR), which comprises 30 percent of a credit rating.

“It compares the balances on revolving debt and lines of credit to the credit limit,” she said. “A CUR under 7 percent is a very good ratio and will favorably impact an individual’s credit score. A ratio between 10 and 20 percent is deemed acceptable, while anything exceeding 30 percent range will negatively affect a credit score.”

If you aren’t carrying any balances on your credit cards, your CUR is likely very low and reducing your credit limit may not impact your score at all, she said. But in the event there is an outstanding balance being carried over from month-to-month, you may want to increase the credit limit on the cards you are retaining by the same amount as that on the card you are closing so that there is little change in your CUR.

To maintain that outstanding credit score, Mott said, you should keep two goals in mind: make all payments in a timely fashion and keep outstanding balances within reason.

“Because payment history is the biggest component of a credit score, even one late payment can cause a score to drop,” she said. “It is possible to get a late payment removed from your credit report by requesting a goodwill adjustment if you’ve had a good payment history in the past.”

The process would entail writing to the creditor and asking that they “forgive” the late payment and adjust your credit report, Mott said.

Remember you can monitor your credit report to see if the change occurs by obtaining a free copy at www.annualcreditreport.com now, then waiting a few months and getting a copy from one of the other providers. Every consumer has the right to a free copy of their credit report from each of the three main providers — Equifax, Experian and Transunion — annually.

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The post was originally published in October 2017.