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With established credit, will the credit score increase or decrease if credit cards are closed

Fri Jun 1, 2007 01:06AM | By Tony

See more in Credit Repair | Permalink | Email | Comments (4)

Q: I established my credit a while back, and I have several lines of credit - mortgage, car lease, student loans and four credit cards. I only use two credit cards with better rates and higher limits. So it doesn't make sense to keep four cards open when I only use two, and I pay them off monthly. Will my credit score increase if I cancel two of these credit cards or will decrease?

A: Your credit scores may or may not decrease very little, and your credit scores will likely improve. Credit reporting agencies use different models when calculating credit scores for different loans. If you close those credit cards, the credit scores used by home loan lenders will likely stay the same or decrease very slightly. The scores used for car loans, will likely improve.

This will happen because the home mortgage lenders give you money for a property which likely appreciates or at the very least keeps its value. That is of course isn't what is happening now with home values going down, but under the normal conditions, it is the case. So if you become delinquent and bank must foreclose your house, theoretically, it should get the money back

Cars lose their value in a hurry, the minute the ink dries on the contract you sign, it depreciates. So in case of repossession, bank won't get its money back, so the risk is higher. It is always easier to let your car go, then to loose your house, right? And the open credit cards represent a potential debt which may lead you to financial problems and eventually to the repossession. So the less open credit cards you have, the less risk you represent as borrower.

Lastly, for those with recent, less than two years credit history, the closing of credit card open accounts will decrease credit scores used for home loans more, so you should try keeping them open. Another thing, having too many credit cards opened will prevent lenders to offer you new credit card deals, some of which can have very good terms, like 0% interest, cash back, etc., or they will offer you much lower credit limits.

Comments

My husband when yet at college had several open credit lines and one day he was just unable to pay them off. I do insist he should have closed some of them down, then he wouldn't have had to file for bankruptcy.

Posted by: Selena | June 1, 2007 03:31 AM

This is an interesting article. Many ’sub prime’ people with bad credit ratings are looking for mortgage finance. One problem is that they are being exploited and misled by disreputable firms and then let down when it comes to the crunch of getting the mortgage. And the issues you raise are relevant to people all over the world who are in this situation. When I’m talking to people in the UK who are looking for a mortgage I usually recommend a company I know from personal experience, called Interesting Mortgages. They have special schemes for all kinds of people, whatever their circumstances. They’re very helpful and reliable and have a good reputation:
http://www.interestingmortgages.co.uk

Posted by: Terry Underwood | June 1, 2007 05:27 PM

It's a good idea to apply for an auto loan in person. Screw up some courage and look the loan officer in the eye. Be upfront about the problems you've had in the past.

Posted by: Alfred Hosting | June 4, 2007 05:26 AM

I have gone through the article, Its a very good article. Keep up the good work.

Posted by: pal | June 6, 2007 01:20 AM

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