This post is brought to you by FICO. I was compensated for this post, but all opinions are my own.
As someone who spends a lot of time reading, writing, and researching credit and credit cards, I sometimes forget just how much misinformation there is out there about credit and credit scores.
A friend reached out to me as he and his wife are looking to go to Hawaii using points and wanted to see what sort of impact signing up for credit cards would have on their credit.
He sent me this text, which was quoting someone else:
Applying dings [your score] 5 points or so (which is restored after 3 months) canceling supposedly does not hurt [your score] unless you are carrying credit card debt on other cards.
Yikes.
Did you catch that? “canceling supposedly does not hurt your score”.
This is the one simple mistake that can kill your credit score.
Credit scores, or FICO® Scores as they are formally called, take into consideration your credit history. In fact, over one-third, or 35%, of your credit score is determined by your credit history.
Imagine if you had just one credit card, and you used it for the past five years. If you suddenly closed it one day expecting it to have no impact on your credit score, you may be in for a surprise. You just voluntarily got rid of a big chunk of your credit history.
Catherine talks about this in one of her recent posts:
I closed my first credit card (the one I got with a $500 limit when I was 18) many years ago, and now I wish I hadn’t! Because lenders want to see that you have used credit responsibly over a long period of time, your credit score depends, in part, on how long you’ve had credit accounts open.
Credit – and how to get good credit – is a mystery to many people. Most people who close credit cards do so in good faith and think they are helping their credit scores.
To be clear, there are situations where closing a credit card my be beneficial. For example if the credit card you are closing is high interest and is not your oldest card. Closing cards will have less of an impact if you have an older card with a long history.
If you want to see the impact that closing cards will have on your credit score, you can find a simulator on FICOscore.com.
I also want to point out the difference between credit utilization and credit history. Credit history is the length of time that you have credit. Credit utilization is how much of your available credit you use. High utilization would be someone with $5,000 of credit available and a $4,000 balance. Low utilization would be the same person having a $500 balance.
What about “churners” who have high credit scores?
One thing to keep in mind about your FICO® Score is that it takes time to build up your score. Cancelling a card could negatively impact a FICO Score.
One thing that is important to address here is credit card churning. There are a ton of sign-up bonuses out there for credit cards, and there are people who open and close credit cards all the time to take full advantage of these bonuses. And some of these “churners” have very high credit scores.
But people who do this didn’t open their first card and start churning credit cards right away. They likely have one or multiple cards that they signed up for years ago (some decades ago) that is the backbone of their credit history. While this credit history may still be taken into consideration for a period of time after closing the card, it will eventually not be considered at all.
The main takeaway here is this: no one person’s credit profile and credit history is the same. You can’t compare someone who has never had a credit to someone who has had a handful of cards open for a decade or longer.
Get the Facts – Stop Credit Confusion
I’ve talked to countless people who do not understand their credit score. Some of them are people who otherwise know a lot about personal finance and money management. For whatever reason myths about their FICO® Score have been perceived as truth.
The good news is this: taking even ten minutes to get the facts can save you from making a mistake – like cancelling a credit card – that would otherwise set you back years.
Here’s a few more facts that you may not know about your credit score:
- Not all credit scores are equal
FICO® Scores are used in over 90% of lending decisions, but not all FICO® Scores are the same. There are different FICO® Scores used for auto loans, mortgages, and credit cards. In total there is a whopping 19 different FICO® Scores that may be used to review your credit depending on what you are applying for.To make matters even more complicated there are many non-FICO credit scores out there that may never be used in lending decisions.
- Keep balances low on credit cards
Some think that as long as they pay off their credit card in full each month they will build good credit. But did you know that the balance that is held at any one time on a card comes into play as well? The balance on a credit card is reported once a month, but it’s not explicitly provided to consumers exactly when this happens. So keeping your credit utilization (balance) low is important.So, for example, if you have a $500 credit limit you will want to keep your balance as low as possible at any given time.
- Not having a credit card is hurting you
Believe it or not, someone with no credit card history is typically seen as more risky than someone who has credit cards (but has managed them properly).
If you want to find out more about what impacts your FICO® Score, consider checking out the resources at FICOscore.com.
Remember: even spending a few minutes learning more about credit scores and how they really work can benefit you for years to come.
Did you ever make a mistake when it came to your credit score because of misinformation? Have you met others who believe credit myths?
Please note that a commercial relationship exists between our site and FICO that may include FICO providing us with product and other forms of payment. The views of the author(s) herein do not necessarily reflect the views of FICO. FICO is not a credit repair organization as defined under federal or state law, including the Credit Repair Organizations Act, and does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” credit records, credit history or credit ratings.
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Great info, DC!
I’ve got one credit card, locked in the safe, that I haven’t used in almost two years. Sounds like it’s good that I haven’t actually cancelled it.
Thanks for the all the good stuff that you provide.
Yes it’s good to have at least one credit card open, ideally the one you’ve had open for the longest period of time. On a similar note, I know some people who get into credit card debt so they freeze/lock up their credit cards. I worry that they will cancel ALL their cards when they get out of debt and that’s not a good idea if you want a longer credit history.
Good info. I’m not a credit card churner but have signed up for a decent amount in recent years to get points. I would never cancel the cards I’ve had for a long time but have considered cancelling the ones I’ve opened recently. If they have an annual fee, I generally just downgrade to the no-fee version but part of me wants to just cancel them.
I’m in the same boat as you. I keep a couple cards open that I’ve had for a LONG time, and those alone pull enough weight to make the ones I opened/closed recently less of a factor on my score.
“Believe it or not, someone with no credit card history is typically seen as more risky than someone who has credit cards (but has managed them properly).”
Word!
Yea so a friend of mine is anti-debt and didn’t want to get a credit card. This person is an amazing saver too. Anyway, they were moving out for the first time and couldn’t find an apartment.
So I talked them into getting a credit card and said that due to their nature they wouldn’t get into debt and that apartment complexes now look at credit scores to determine whether to rent to you.
Anyway took them a few months to build up their credit but eventually they were able to get a rental agreement at a complex.
I think this story is all-too common. I have a few friends in a similar situation where they didn’t have a credit card until they realized “crap, its’ not really about debt – it’s about establishing credit.
I’m definitely a little trepidatious about finally closing our mileage card. I can’t justify the annual fee anymore. Well, I never could but I’m finally getting around to doing something about it. But we’ve had it for around 9 years. Luckily, we have one other card that’s been open around that long, so our credit won’t take too much of a hit. But it’s definitely something I’ve been fretting about.
You’re right, this is one common mistake I’ve seen many people make. I have cards that I haven’t used in forever, but I was faithful with paying them back and built my credit history using them. I may not use them, but they are locked away and the only way they will get closed is if the company sends me a letter telling me they are closing them. For example, I have a Lane Bryant card from about 4 years ago because I could wear their clothing. Well, now I can’t…card no longer gets used at all. Many in this situation may think it would be best to close it, but perhaps they know someone who shops at Lane Bryant. They could purchase gift cards using that credit card and pay off the balance in full each month and continue building credit.
Mr. Carlson:
Dennis Small writing from Burnsville, MN this sunny Monday morning June 20th! I enjoy both scanning through your blog postings and devoting larger break periods to reading he in-depth money articles.
I have been working with a personal financial coach over the past year and was recently approved for an extended six month “wrap up period” to both establish a solid working monthly budget and improve my credit rating scores. The program is titled “Prepare + Prosper” and operating undering undering the umbrella of money Mentors” which is located at Minnesota 280 and University Avenue. Just due East of the KSTP broadcast tower!
I have been divorced over fifteen years after a twenty-eight year marriage. Within the past week, I finally paid off any outstandind loans (in my name) and any outstanding future costs might be a two or three hundred dollar purchase on a credit card with the intention to pay off within a two month period. I am planning a driving trip next Spring and would like to have a few thousand dollar credit limit as a monetary safety cushion.
What suggestions might you have to reach that goal? My last goal was to purchase my 2015 Toyota RAV4 with outright cash -$28,000- from quitting drinking soda pop, smoking and the afternoon cocktail everyday! Also, every afternoon what ever loose change from the end of the day also went into the empty water jug turned upside down!
You write an interesting subject!
Please do not reprint this query if you please!
My question about having credit cards, with out a secured limit, is how to raise the credit limit? I have presently 18,000