It’s a temptation many of us have when we’re looking to borrow money. Should you cancel your credit card account as a way to increase your credit score? Would closing a credit card account impact your FICO score? While situations vary, the answers to these questions may surprise you. With banks and credit card companies charging more fees than ever before consumers have to be on top of their game. Reading the mail and the fine print on bank and credit card statements could be the difference between paying more in interest and securing an attractive mortgage rate when it comes to refinancing your home.
Let’s address the first question on the minds of many looking to refinance. Should you cancel your credit card account as a way to increase your credit score? No. Closing your credit card accounts impacts a credit utilization ratio used by Credit Bureaus to calculate the amount of debt you have compared to your available credit. Your FICO score is likely to fall as your debt levels rise relative to your limits. This could cost you thousands of dollars in interest when it comes to refinancing your home. This is why it’s a good idea to call your credit card company and work with them before canceling your credit card accounts. Reading the mail from your credit card company notifying you of any changes in interest charges, fees and billing structure will keep you informed with the option to decline the fees and pay off the account under its existing terms before closing your account. Credit card companies literally bank on you not reading the fine print. They know you and thousands of other Americans are usually too busy to read statements and account terms each month. Taking the time to do so could save you thousands of dollars over your lifetime. Don’t close your credit card accounts but pay them off as soon as possible.
Would closing a credit card account impact your FICO score?
Yes. It’s up to you to predict the possible impact closing accounts will have on your credit. To do this you’ll have to consider two things. First, you’ll want to compare your current balances to the combined limits on all your credit cards (this is your credit utilization). Second, you’ll want to look at the age of your accounts, in other words the length of your credit history. Your credit utilization ratio accounts for 30% of your FICO score and the length of your credit history won’t change for another decade because positive information from closed accounts stays on your credit report for 10 years. If you want to estimate the change in your utilization ratio, add all your credit limits and all your balances and look at the percentage of available credit you’re using. Then take away the cards you intend to close and do the same calculation again. If your utilization ratio increases, you can expect a decline in your FICO score which means paying more in interest when you go to refinance your house. In many cases you’re better off paying down the debt on the credit cards charging the most interest first and then closing those accounts. This will improve your FICO score and demonstrate a history of paying your bills to lenders.
Maintaining good credit requires constant effort. This is why it’s a good idea to read your mail and keep important letters from banks and credit card companies. If you don’t like paper cluttering your desk and kitchen counters, call your bank or credit card company to see if this information is accessible online. It’s also a good idea to close cards with lower credit limits first since they’re the ones you’ll be able to pay off the quickest and close that much sooner. This will protect your credit score while preserving your credit utilization. Finally, it’s always good to check your credit report for any errors. Free copies of your credit report can be obtained from each of the three major bureaus once every 12 months.
When it comes to refinancing your home and getting an attractive mortgage rate it’s best to keep credit card accounts open and pay them off as quickly as possible.