Expert: David McArthur - 11/9/2008

Question
Hello,
I am curious about certain factors that might raise, lower or have no effect on my credit score.

Please know that I pay off my credit cards each month.

If I have a credit card I no longer use, should I close it, or leave it open with a zero balance?  If I leave it open, should I reduce the credit limit?

For cards that I still use, if I don't come close to reaching out the credit limit, should I reduce the credit limit?

What happens if I open a new credit card account (VISA, MC, etc.)?

Thank you for your assistance.

Answer
David-

This question has many facets.  I commend you for using your credit cards responsibly. First let me start by suggesting that you find out where your credit currently stands before making this decision.  I recommend going to Fico's website and ordering your credit report with scores.  Keep in mind credit reports are free but scores are not and all scores aren't created equal. I specifically recommend myfico.com since most lenders use their score in making credit decisions. That being said, you will find out what is impacting your scores and which cards you should (or should not) change.

One rule of thumb is to consider which relationships you have had the longest.  This is important since length of credit history is a component of your score.  As a result, closing the card with your longest history could heavily damage your score at least for a little while. On the other hand new credit relationships will also impact your scores.

Another factor is your debt ratio.  Given the fact your balances are paid monthly you might not have too much to worry about.  However any changes to your limits will affect your usage ratio.  For example your revolving credit picture could look like this:

Amex         5000
Discover     2500
Anybanks MC  10000

If in a given month you spend 4000 on your cards and didn't pay them off  completely (or it wasn't reported as fully paid because of mailing or processing time) your revolving debt ratio could be at 22.3 percent. This would be ok for FICO and your scores should be relatively fine.  But by reducing Anybank MC to 5000, Amex to 2500 and closing Discover your ratio changes to 53.3 percent.  That would hurt you quite a bit since now your usage ratio is too high.

Considering your upcoming major credit purchases will help you decide if and when you reduce, close, or open any lines of credit.  I understand you want to limit your exposure for quite a few different reasons. Any changes in your limits or open lines of credit will affect your score for a brief time.  But continued responsible use of credit will help restore your scores. By knowing where you stand you will make the best decision for yourself. You might also benefit from leveraging your current credit relationships if you are looking for better rates or incentives.

Hopefully I was able to answer to your satisfaction.  I specialize in helping people raise their credit scores.  Please visit my website at www.financialscoringsolutions.com