Close A credit Card Account Or Not? Need Advice

[questions]

I was looking for some advice. My wife and I have outstanding credit (I am just under 800 and she is just over 800 for our personal credit scores). We are looking to purchase our first home in the next few months. One thing that concerns me is the huge rise in identity theft in this country. If we have credit cards that do not have a balance and that we do not use very much, would we be better off closing those accounts and cancelling the credit cards to avoid those accounts being stolen and used? How much of an impact on our credit will there be if we are suddenly closing multiple credit card accounts?

[anonymous_saver]

Since you are looking to buy a home within a few months, do not close these cards! This will lower your FICO scores, and they are fantastic right now! If you close multiple cards before you get a mortgage, your FICO will drop - at the very least, try not to do this before you get the mortgage just in case your FICO drops dramatically.

After you buy the house, if you do not plan on getting any new loans for awhile (school or car for example)... if your credit cards have an annual fee, call the company and try to get it removed - if they don't, then cancel the card. Also, do any of these cards have your longest history on it? If so, then keep the card(s), it helps your FICO stay high by having a long history.

Why is it that you are so scared about identity theft? How many times a month (or year) do you use these cards? Maybe rotate your cards so that you use one card per month that you pay off immediately, that way you can keep the history on them, but you can hide the cards inside your home until the one charge a month comes up (that way you wouldn't be keeping them in your wallet).

How many cards do you have?

[JoyJoy]

Excellent advice anonymous saver! You pretty much have covered all the bases.

I would venture to add that I subscribe to a credit monitoring service (TrueCredit) because of the credit alerts it gives if someone is seeking credit under my name at any of the three credit bureaus and also for the credit reports and scores that TrueCredit generate each month. This could stop identity theft in its tracks IMHO.

[poundwise]

Wow.

You can expect a lot of advice on this subject. It comes up frequently and a lot of conflicting answers will no doubt follow.

I think the bottom-line is that you won't find an ACCURATE, ABSOLUTE answer.

For instance, no offense to the poster above, however, while concerns about the FICO score are worthwhile, you also must realize that open credit lines are counted against you by mortgage lenders, who tend to view open/available credit as potential debt. It is often figured in just as if it were actual debt, even though you owe nothing at the present time.

There is also the additional factor that if these accounts have been dormant (unused for a period of time) then they are already not factored in your FICO score in the same way as open and currently/recently used accounts are; such as for the credit utilization score. It is a bit of a misunderstanding that people have that keeping accounts open, but not using them, somehow helps their credit score a great deal.

My quick response; what I might do if it were me (and not knowing other factors about your situation), is that I would be looking at the prospect of closing most of the open accounts, leaving open the oldest ones. That is, if you have 5 open, but zero balance, credit cards, I would close three, keeping the 2 oldest accounts open. This can actually improve at least one aspect of your score due to the fact that it will increase the average age of accounts, while at the same time, it lowers that "potential debt" that mortgage lenders care about.

However, a best approach may be to talk to a mortgage lender. Someone with the organization who knows how the process works and what their company looks for when they pull your scores/reports, and consider your debt to income, etc., etc. They should be able to provide you with specific advice leading up to purchasing a home.

[JoyJoy]

No offense taken Poundwise, LOL. I felt anonymous saver's answer was more than adequate regarding whether the OP should close their accounts or not. I was just adding my two cents regarding one's worry about identity theft. Credit monitoring could allay those fears by notifying them that someone is applying for credit under their names/account. The fear of identity theft seems to be the main reason the OP wants to close their credit accounts.

[sweeps]

I like the suggestion to first seek out a mortgage lender (or a mortgage broker which is my preference). Your lender will advise you on what you'll be able to borrow and what, if anything, you could do to help (or at least not hurt) your mortgage application.

[JoyJoy]

This is why I love this forum! Smart people and a variance of suggestions!!

[jlvkfyang]

My 2 Cents.

I just recently bought a car using a loan. The lender advised that I should not close any open "revolving credit" accounts. This will lower your "available revolving credit Percentage" which should never be below, I think he said 35%. Mine was at 81%.

If you know where the cards are, and you don't use them anymore, just lock them away, and keep the credit lines open. Generally, it is a good choice to do this.

My 2 cents.

[newlyfrugal]

The poster above who said that the mortgage companies look at credit card limits differently than other loan companies was correct. When we were getting ready to apply for a mortgage, having too high of a limit hurt us, even though our balance to limit ratio was small. They looked at our liquid assets and our "available debt" and then had to factor in all non-liquid retirement monies we had to make their numbers come out right. If we had LESS limit with the same balance we would have been better off.

I asked this very same question not too long ago and the consensus in the end seemed to be, do what you want, just make sure you have TIME for your credit score to adjust to any changes. Closing the accounts you are talking about could lower your credit score, but realistically it probably wouldn't drop it more than 50 points. A score less than 750 can start to hurt your interest rates, so you have some wiggle room, I think.

You have two options: close and definitely impact your score, or keep them open and leave it the way it is. Just don't know which would hurt you the most in the eyes of the mortgage company.

Good luck!
Sara

[poundwise]

My 2 Cents.

I just recently bought a car using a loan. The lender advised that I should not close any open "revolving credit" accounts. This will lower your "available revolving credit Percentage" which should never be below, I think he said 35%. Mine was at 81%.

If you know where the cards are, and you don't use them anymore, just lock them away, and keep the credit lines open. Generally, it is a good choice to do this.

My 2 cents.

I'm not sure I understand this... but assuming that I do...

The item under consideration is a single component of your credit score called the credit utilization ratio. What that means, in simple terms, is that it is a comparison of how much credit you have available to how much credit you have utilized (used).

An easy example is to assume you have two credit cards, each with a $500 limit. One card has no balance and the other has a balance of $200.

In this simplified example, your credit utilization would be 20% because you have a total available credit limit of $1000 and have a balance of $200, or 20%.

Though there is conflicting info about what is ideal, it is almost a certainty that you want your credit utilization ratio to be below 50%. I believe 35% (the figure referred to above) or lower is best.

It is simply a measure of how much of your credit you are using.

It is not necessarily a reason to keep cards open.

Take the example here. Let us say that the person has four $500 limit cards instead of two. In this instance, three of the cards have no balance, and the one card has a balance of $200.

This person's credit utilization ratio is 10%. ($2000 compared to $200)

If this person closes two of the cards, the ratio is 20%.

20% is very good. There is no reason to prefer 10% over 20%. Also, in this little example, if you paid $100 toward the balance on the one card, and then closed the other two, guess what your credit utilization ratio would be? 10%

This is why IT IS wise to pay off cards or close zero balance cards and IT IS unwise to close all your cards before paying them off (i.e. - when becoming zealous about getting out of debt for instance); however, there is little to no reason to maintain several, never-used but open, credit accounts. In fact, though FICO is a bit mysterious about this, once an account goes dormant it is not figured in the same way any longer anyway. So an unused open account likely doesn't help anything.

Add to that the fact that open accounts can hurt you when it comes to mortgage lending and you can see why I said it is not easy to get a single, absolute answer to what should be done.

You can understand the facts though.

And... as I suggested, talk to the mortgage lender about it. They know what they are looking for in terms of a candidate for a mortgage loan. They can be a great source of information regarding what you should do when it comes specifically to obtaining the loan and getting the best rate.

[poundwise]

will it help if you decrease your available credit limit on the card?

I'm not sure what you are asking. As I stated, once you understand the principles and factors, then you can derive an answer.

Basically this --

IF you have a lot of open credit AND it will be a problem with a mortgage loan, THEN decreasing credit lines can help in terms of lowering your available credit (viewed as available debt.)

However IF you reduce your credit lines AND you still carry a balance or balances on other cards THEN you can skew your credit utilization ratio in a negative way, which CAN affect your score in negatively.

IF you can close accounts and/or decrease limits WITHOUT raising your credit utilization ratio above 35% THEN there is really no reason not to IF it is concern or if you just want to close some accounts.

[JustinH]

The media scares people, with identity theft this and identity theft that.

Its more common to be stuck by lightning while hitting a hole in one on a golf course than have your identity stolen.

Use common data safeguard techniques, and use your head.