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John Thomson  

Thomson report

I am doing some research and interviews on the Credit Bureaus in this country and the Credit Score, which I happen to believe a lot of people don’t understand how important this score is to your life. Being interviewed for a job, trying to get a mortgage, buying something like a car your score signals the seller that you may not be the person you represent when it comes to giving you credit approval. There is also those TV ads that run from time to time and are trying to sell you on the idea that you can get your credit score free, when what they are really trying to do is get you to sign up for monthly reports and they of course charge for this on your credit card every month.

How many have checked your credit score recently? Probably not a lot of you but do you realize there may be some mistakes on your credit report that could easily be corrected? You should be checking your credit at least once a year. But more on that later.

I was reading the Credit Score Report in my search for information because one of the questions I have received from readers: Is it true that cancelling a credit card can hurt my credit?

Well that statement is quite true and it could cause your credit to fall, although it doesn’t have to.

Their columnists are constantly fielding questions from their readers about credit issues. However, over the years, we've seen certain issues pop up more often than others.

Will cancelling a credit card hurt your credit?

Cancelling a credit card eliminates the line of credit associated with that account. As a result, depending on your overall debt levels, a key ratio used to calculate your credit score might change. Known as the credit utilization ratio, it compares your credit card balances to the credit limits on those accounts. When you close an account, you may be pushed closer to your credit limits. That can make your score drop and make you look like a risky borrower.

How much will it drop? It depends. There are too many variables to provide a meaningful estimate of the possible point damage from closing a card. While damage estimates are difficult, FICO -- creator of the most commonly used scoring model -- leaves no doubt about its importance. Among the FICO score's components, credit utilization falls into the "amounts owed" category, which accounts for 30 percent of that score. That's the second biggest part of the equation.

The impact to your score from closing a card can be immediate, a few months or years later or not at all.

It isn’t likely to be severe but it can hurt credit scores.

No debt on the closed account, but balances on other cards. If you pay off the card before cancelling it, but carry balances on your other accounts, your overall credit utilization should increase and your credit score may fall. Let's say you have two open cards, each has a $5,000 limit, but one has a $2,500 balance while the other has a zero balance. That means you have $10,000 of available credit and $2,500 in debt, for a utilization ratio of 25 percent.

No balances on any cards. If your credit report shows no account balances, your credit utilization won't change when a card is cancelled. In such a case, you have a credit utilization percentage of zero percent. Thus, reducing your available credit in this instance will not change this percentage from zero percent and your score can remain unaffected. That's a good reason not to carry balances when you plan to close an account. It is worth noting, however, that paying off your card balances every month doesn't guarantee that your credit report will show zero debt. That's because banks often report the most recent statement balance on your account, whether or not it has already been paid in full, to the credit bureaus.

The credit lines associated with a closed account may not immediately come off your credit history. That could also mean a delay before your credit score reflects the change.

You could be waiting for much longer for those closed accounts to come off your credit history entirely. That's because your credit report includes both open and closed accounts, as well as notations about those account's payment histories.

How to minimize the impact:

Look over your credit reports. These reports will show where you've gone wrong in the past -- and how you can be a better borrower in the future. If you spot any damaging errors on your reports, be sure to dispute them so that they no longer hurt your credit.

You may be thinking of closing an account that has no negative items associated with it. In that case, from a scoring perspective, the best choice may be to keep the account open, thus ensuring its positive history continues to benefit your credit score indefinitely. The age of an account factors into credit scoring, with old accounts considered being better.

If you still want to close an account (perhaps due to an annual fee or to prevent its use by identity thieves), be sure to contact the bank and let them know you would like to have the card cancelled. Shredding or cutting up your plastic has no impact on the account status -- it just ruins the card. You may also want to send a letter explaining that you want the account closed. It's a good idea to check your credit report a month or two after requesting that the account be closed to ensure it has been reported correctly.


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About the Author

John Thomson is the Okanagan's pre-eminent business columnist writing his column, Rumours and Things, for over 24 years. Plugged in to the valley's who's who, John keeps his readers coming back for more with his straight talk and optimistic perspective on where we are headed next.

When John is not writing his column, he runs a sixteen year old think tank called the Executive Roundtable and holds his popular "Thomson Presents" quarterly business speaker seminars.

Have a comment, question, or tip for John? 

E-mail John at
[email protected]
or send him a fax at 250-764-8255.

 



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The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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