One of the great myths of credit scoring is that closing unused credit card accounts will
help to improve your scores. The assumption is that having too many unused credit
cards hurts your credit scores. And, while that might make common sense, the opposite
is actually what’s true. Having many unused credit cards actually helps your scores
quite a bit.
There is a fairly well known but poorly understood component of all credit-risk scoring
systems called “revolving utilization”, sometimes called “debt utilization”, which is not
completely accurate. Revolving utilization is the relationship between the balances
and the credit limits on your open credit card accounts, expressed as a percentage.
To determine the utilization on one of your credit cards you simply divide the current
balance by the credit limit and multiply that number by 100. This will yield the utilization
percentage of that one account. So, for example, a card with a $1,000 balance and a
$10,000 credit limit is 10% utilized.
A second way to calculate utilization is by adding together all of the balances on all of
your credit cards and then dividing that number by the sum of all of the credit limits on
the same cards. So, for example, if you have $10,000 in aggregate credit card balances
across all of your open cards and those same cards have $50,000 of aggregate credit
limits then the utilization is 20%. This is called “aggregate revolving utilization” while the
first example is called “line item utilization.”
Both of these percentages are used to determine your credit scores. And, thepercentages are a very valuable factor. The higher the percentage, the lower you score
will likely be. In the FICO system utilization is part of a category that determines 30% of
the points in your FICO score.
If you were to close unused credit card account then you could actually increase youraggregate utilization. You’d be removing unused credit limits from the calculation, which
has to increase the aggregate percentage. Follow this example…You have $10,000 in aggregate credit card balances across all of your open credit cards.
You have $50,000 in aggregate credit limits across all of your open credit cards.
You close a card that has a $15,000 unused credit limit. Now your aggregate credit limit
is $15,000 less, or $35,000. And, your utilization percentage has gone from 20% to 29%
and your score may have just gone down.
So, leave them open!!
“The Credit Guru”, Longtime FICO Insider & Credit Industry Authority President Of The Ulzheimer Group, LLC
John Ulzheimer is a nationally recognized expert on credit reporting, credit scoring and identity theft. He is the President of The Ulzheimer Group, the Director of Credit Education at DisputeSuite.com, Credit Expert at CreditSesame.com and the credit blogger for Mint.com. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. He has served as a credit expert witness in more than 150 cases and has been qualified to testify in both Federal and State court on the topic of consumer credit.
