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Be Cautious About Canceling Credit

HI12-4-13A solid credit score is a must-have for investors, and. as Jason Hartman says, it’s essential to protect that score like the treasure that it is. One way to do that is to cancel those unused credit cards taking up space in your wallet, right? Think again, say financial experts. Getting rid of unused cards may hurt your score more than help it.

Credit scoring is a touchy business, with ins and outs known only to the folks at Fair Isaac (more commonly known as FICO) and other credit reporting agencies. And some of the factors that should logically help a credit score can look bad, while others that should compromise it can actually help. According to a recent post from The Motley Fool, many consumers put their scores at risk by failing to consider the “big picture” of how all those cards work together.

Credit scores depend heavily on the length of a borrower’s credit history, and the borrower’s debt-to-credit ratio. Compromise either of these things and the credit score is almost guaranteed to take a hit. So canceling unused cards may play an unintended role in affecting one or both of those key elements of credit scoring

Closing an account doesn’t eliminate its tracks. Even if it’s been gathering dust, that card remains on a borrower’s permanent credit record for seven years. What’s more, since a long credit history plays a major role in determining credit scores, removing old cards can shorten that history considerably.

Since another major factor in credit scoring is the debt to credit balance, even unused lines of credit are counted as available credit against the amount of debt a borrower aerially carries. Eliminating dormant cards can tip the balance unfavorably by reducing the amount of available – even if untouched – credit in relation to credit card debt.

But on the other hand, having too many credit cards – more than seven. according to Fair Isaac – also raises red flags. So some prudent pruning of some cards could be helpful – under certain circumstances.

All cards aren’t created equal, so to reduce the number of accounts to something more acceptable to FICO, experts suggest starting with store credit cards and special-promotion cards that offer wildly attractive introductory rates or special perks for opening the account. It’s wiser to get rid of newer cards and keep older ones that reflect a long-standing relationship with their issuers.

Killing a credit account isn’t as simple as just cutting up the card, or vowing never to sue it again. As long as the account is live, it remains in play – so if the card is lost or stolen, it can be abused. And any fees associated with the account will still accrue. It’s essential to formally close the account with its issuer and get confirmation in writing that the account has been closed –at the request of the cardholder. That way it’s clear that the lender didn’t terminate the account for nonpayment or other credit damaging reasons.

Good credit opens doors for income property investors. And protecting a good credit score depends not only on managing the cards you do use, but also on how you handle the ones you don’t.  (Top image Flickr/theconsumerist)


Yuchin, Dayana. “Don’t Cancel That Credit Card!” The Motley Fool Personal Finance. The Motley Fool. 3 Dec 2013

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The Heroic Investing Team

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