A Credit Card Dilemma

Bridget Walsh has been listening to lawmakers say that the new credit card bill moving through Congress might mean higher annual fees and interest rates for consumers, but that people can shop around for better deals — the market will make sure they have choices.

She writes:

I keep hearing that part of your FICO score depends on how long you keep a credit card along with how well you pay your bills and how many inquiries into your credit you have. So if cards that I have had for a long time (with no balance) now impose annual fees, it seems that either I will have to suck up and pay the fees or risk lowering my FICO score by closing that account and shopping around for better deals. Even though I have 3 cards with no balance and no annual fee, I might be tempted to close one or more accounts to keep from paying fees and thereby lower my score even more by reducing my credit line.

Gail Cunningham of the National Foundation for Credit Counseling has an answer, after the jump.

FICO scores, which banks and other lenders use to consider how risky a borrower you are, weigh five major categories, Cunningham says.

1) Paying your bills on time — 35 percent of your FICO score.
2) Ratio of credit available to credit used — 30 percent.
3) Longevity of credit accounts — 15 percent.
4) Applications for new credit — 10 percent.
5) Using a range of credit, from fixed payments like a house note to open-ended payments like credit cards — 10 percent.

Canceling a credit card would nick your points in the second and third categories. If you close an account, you obviously affect its longevity — bad for that portion.

If you close an account worth $5,000, Cunningham says, that means you have less overall credit available, which would affect the ratio of credit available to credit used.

So yes, closing accounts and applying for new ones threaten your FICO score.

What's the optimum ratio of credit available to credit used? "I don't want to see anyone use more than 30 percent of their available credit," Cunningham says. "That makes you look as though you don't have any cash and you're desperate for credit."

And a note to people like me who have cards but almost never use them: Take those cards out and buy a little something, Cunningham says. Pay them off at the end of the month, but do use them. "New credit is hard to come by these days," she says. "You want to keep all of your existing lines of credit. All in the world you represent to a credit card company with your unused card is risk — because you could go out tonight and spend it all."

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