Will Dropping A Credit Card Affect My Score
I have read a few of the posts on this forum regarding improvement of credit scores, and I couldn't seem to find an answer to my inquiry (but perhaps I didn't look hard enough).
I am very fortunate and do not have the serious credit issues that other members have candidly shared with this forum. I graduated from college with a credit card from Chase bank (it was then still Bank One) with a credit Limit of $500. Nothing big. I moved apartments and summer life got the best of me and I missed two months of payments. I then paid the card off completely and didn't think there would be any problems (I wasn't aware of credit bureaus or scores or anything) because I had paid the card off. For some time I didn't even use the card, and when I signed onto my account on chase.com it would display my checking/savings and credit card right there. Finally one day I went to use it and it did not work, that is how I found out the card had been closed. I again didn't think this would be a big deal and I went to reopen a credit card with them, and was denied. After this embarassment I began to learn about credit scores and have been working to rebuild my credit.
According to creditkeeper.com my current scores with the three unions are:
Equifax: 677
Experian: 674
TransUnion: 631 (this is the union that was most affected by my credit mishap, about 6 months ago it was in the 300ish range)
My credit is getting better and I am very good about paying my bills on time. In terms of credit I had a card through Capitol One which I just consolidated with another cap 1 card and the credit limit is 1,750, and has an APR of 10.31%. I also have a BP card through Chase with a credit limit of 300 but has a pretty high APR at 23.24%. I have just opened a new mastercard that has a credit limit of only 300 but a 0% APR for a year. I opened these two cards to help improve my credit score, but I would rather only have two open. My first choice would be to close the BP card due to the high APR, but since it is with chase and therefore TransUnion, would closing the card lower my credit score with TransUnion? Would it be a smarter move to try to consolidate all of my cards into one (the card with the 0% APR)? I am new to all of this and any advice is appreciated.
Thank you.
Re: Will dropping a card affect my score?
a few thoughts on your score and raising it through credit cards:
1)You want to carry a 15% to 20% balance on the cards to raise your credit. this is a fast way to boost your score without making major purchases. cards with no annual fees and low APRs are best for this, ignore any "bonuses" like sky miles or cash back, you only want to pay the smallest amount you can while holding onto this balance.
2) many companies report your LIMIT as whatever your HIGHEST BALANCE has ever been. Capital One is one of these companies. this means if you have a $2000 credit limit on the card, and put $400 dollars on it one time, to boost credit, you are actually HURTING yourself, as Capital One is reporting you carrying a balance of 100% of your credit limit! put $2000 dollars on it immediately, then pay off during the no interest grace period (make sure you have such a thing on that card), then carry the smaller balance. Capital One will then HAVE to report your limit as $2000. Why this is a legal practice in credit reporting, ill never know. avoid companies that do this unless they are your only option.
Re: Will dropping a card affect my score?
It would, IF your debt / income ratio is currently above a percent and IF dropping said card would lower it below a certain threshold as illustrated in the below guide:
Financial Health Barometer
If your debt to income ratio is:
Less than 30%: Excellent!
30% to 36%: Good. You won't have any problem with lenders, but work to bring it down below 30%.
36% to 40%: Borderline. Some lenders will still give you a loan but you may struggle to make your payments.
40% or higher: Red flag. Your credit situation requires attention.
What helps further is pay down balances.
Re: Will dropping a card affect my score?
There are truths in both of the above replies. It is best to pay the card completely off and simply not use it, cut it up, or hide it somewhere. Of course you want to make sure there are no annual fees for using the card and check to see if they will close it themselves after so many months of inactivity. It is best to keep credit cards paid off all the time, or at least below 30% of its utilization ratio.
The problem with closing the account is it is going to lower the overall utilization ratio on the report. This ratio does no only affect cards in an individual way but the ratio of all the cards combined factors into the actual credit scoring. So, if you don't have a better card that you are opening (which can also initially lower your score) it is probably best to pay it off, keep it open, and simply not use it.