Credit
Ask Jean Thursday: Does it Matter Who Closes My Account?
Posted by Jean
“I received a letter about my APR going up from 14.72% to 18.99% on my credit card, and was given the option to ‘opt out’ of the rate increase. I understand that by opting out, the APR will remain the same until the card expiration date, and then at that time the account will close. I seldom use the card, and have been paying down the balance on a monthly basis with a bit over the minimum payment. Does closing an account at a ‘customer’s request’ hurt a credit score? Currently, my credit score is 775, and I don’t want to do anything to hurt that.”
-Kerry, New Jersey
Your credit score is partially calculated using something called your debt-to-credit ratio (also known as your utilization ratio) – it accounts for about a third of your credit score. When you close an account, you lower the amount of credit you have available to you. That will generally lower your credit score — the question is by how much. Your ratio works to your best advantage when you’re using only 1/3 or less of your available credit.
So, to answer your question, think of your available credit as a pie. Is this card a big slice of the credit you have available, or is it a small, “I’ll pass on the whipped cream” sliver? For example, if you have $10,000 in available credit, and this card equals $8,000 of that, that’s a big piece of pie – you may want to re-think letting that account close. But if it’s only a small piece of your available credit, it may be worthwhile to pay off the card at the lower rate by the time it expires, and take the inevitable (but small) hit on your score.
If you’re still unsure, Gerri Detweiler of credit.com suggests taking into consideration the amount paying off the balance at the higher rate will cost you in actual dollars and cents. You can use an online calculator like the one at CNNMoney.com to figure out what it will cost you to pay off your balance at the current rate, and compare it to the overall cost at the higher rate. Knowing how much (or little) you’ll actually save by sticking with the lower rate can help you put the rewards and costs into perspective.
You may be surprised to hear that, in terms of your credit score, how an account is closed isn’t a variable at all. According to Maxine Sweet of Experian, “whether a lender reports an account as ‘closed’ or ‘closed by consumer,’ the impact on your score will remain the same.”
My advice: Keep an eye on your score as you go through the process using the free score tools at credit.com, quizzle.com, and creditkarma.com. Then you’ll be able to react in real time to maneuvers that are helping — and hurting you. And you’ll be better able to make the right decisions in the future.
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I understand HOW the remaining available credit on credit cards affect credit scores, but WHY is it included? As someone who would happily loan money to others (and I do through my bank accounts and investments), I do not want to loan as much money to folks with excess available credit on credit cards. That means that they can borrow that money too. Why isn’t the credit score calculated based on your income, your bills, your assets, and your payment history alone? Are we so lazy-minded that we think that available credit on credit cards is equivalent to payment history or are credit card companies overly influential on the credit rating system? This encourages people to use credit cards instead of cash or debit which most personal finance gurus warn us not to do as it takes away the sting of spending.