Know Your Score - Part VI

Advice is cheep. Bad advice is expensive!

One of the biggest myths about credit scores is if you pay off a credit card, close the account. I've had my bankers tell me this. In most cases this could hurt your credit scores more than having a couple of late payments. Here is the reason why.

Today a lot of people play the credit card game. They get an offer for 0% interest for 6 to 12 months on balance transfers from other credit cards. Now this may seem like a good idea, and can be. However, if you apply for receive and transfer the balances from your older established cards to a new one with a large balance to high credit ratio and close the three accounts that you paid off, you could substantially reduce your score. Not to mention making a late payment on that one card could be disastrous!

Here is why;

If 15% of your credit score is credit history, by closing older established accounts will decrease your score.

If 30% of your score is your balance vs your high credit limit then your score will decrease.

Let's take a closer look:

Credit bureau score 712*

If you have four credit cards with balances under 30% of the credit limit or less, then you have a fairly balanced credit report.  The score would be even higher if the balances were below 10% of available credit.  The key here is there is activity on the cards, they have been established for a number of years  and they have all been paid on time.  Ideally these cards could be paid off at any time.

While the above is a "snapshot" of a credit report, it represents what can define a good score from a great score and often the difference from getting a good loan rate and an outstanding loan rate!

If you were to pay off the three of those cards and transfer those balances to a new card, Visa for example you could help increase your score if the credit limit on the new card is substantially more that the balances you transfer . But if you close the older three accounts your score will go down. A lot.

Let's look

Credit score 623

  This is how many people destroy their credit score without missing payments and being a responsible borrower.  By paying off and closing three out of four credit cards, the bureau now will only read the one existing, open tradeline.  By moving the balances off of established credit cards and closing them to a new cards with no history and maxing it out you will have adversely affected your credit score.  Now instead of four revolving trade lines, accounts, you now only have one. And that one card is over 70% of available credit. If credit history is 15% and credit balances are 30% of your score respectfully, then you've affected a whopping 45% of your score. In this example this could reduce this score even into the 500 range within a matter of weeks. And would take YEARS to get this score back up into the upper 600 to low 700 ranges.

Understanding your credit scores and how to manage them is critical to always being able to obtain the best rates and terms for any loan you apply for. It is always a good idea to check to see what affect a new card or closing old ones will have on your score before you make that kind of change. Always check with a credit score expert before you make any drastic changes to your credit profile. More about your credit score in the following articles.

Don Davis

*Examples only and do not necessarily reflect anyone's actual credit report