Relationship between Credit Cards and Credit Scores

Dear myFICO,

I'm trying to get my finances under control and would like to consolidate the 6 credit cards I currently have into 1 or 2 cards that have zero-balance transfer options plus lower interest rates.

What should I do with the cards I no longer want to use? I've heard that closing them can affect my FICO score.

Eric
Chicago, Illinois

Dear Eric,

How closing and opening credit cards affects your FICO^® score is a common concern, so you're smart to get the lowdown before doing something that could hurt your score. The short answer: we never recommend closing old or unused credit cards because this rarely helps your FICO score.

Here are some basic guidelines for credit cards that can stop you from unnecessarily dinging your FICO score:

• Only apply for credit if you need it and plan on using it.

• Don't close the old cards that you're not planning to use any longer.

• Only fill out an application for the credit card that meets your needs.

• Find out which actions help and hurt your FICO score. This free booklet is a great place to start!

Only apply for credit if you need it and plan on using it. No, saving 10% on your purchases at department stores doesn't qualify as needing credit. Often, the initial 10% savings is far offset by the typically high-interest rates these cards charge. If you don't pay the full balance off the first month, you could end up paying far more then the initial 10% savings. Opening unnecessary accounts can also backfire when you need to make a big purchase and find that your score has dropped causing you to no longer qualify for the best rates. There is no "golden number" of charge cards, but opening cards just to gain a small savings is usually a bad idea.

Don't close the old cards that you're not planning to use any longer. I know this may seem counter-intuitive, but there's a fairly simple explanation. One of the most important factors in your FICO score is your balance to available credit ratio. Using all or most of your available credit can be a sign of looming financial stress. How does this ratio work? Let's say you have $5,000 in available credit and are using $1,000, this is better than if you had $1,000 in available credit and are using $500. The ratio in the first case is only 20%, but the ratio in the second is 50%. Closing an unused credit card wipes away some of your available credit and causes this ratio to increase.

Only fill out an application for the credit card that meets your needs. Each time you apply for a credit card, a credit inquiry is added to your credit report. The credit-card companies do this to decide if you're creditworthy, and if so, how much credit to extend to you and at what interest rate. Although these credit inquiries don't usually significantly hurt your FICO score, they can lower it. Especially if you have many credit inquiries within a year. For that reason, consolidating your current balances to 1 card instead of 2 would be better. Credit inquiries can lower your score because people who are actively seeking credit have been proven to pose more risk to lenders than people who are not seeking credit. So, shop around for good deals, but only fill out an application for the right card! And don't worry about checking your own FICO score - that type of inquiry has no effect on your FICO score.

Find out which actions help and hurt your FICO score. There's no point in guessing when you can get this information for free! And taking advice from your local know-it-all can be a recipe for disaster. Take 10 minutes to read this short booklet called Understanding your FICO Score. Reading it will help you make sure that you keep up FICO healthy behavior!

Sincerely,
myFICO Team