As one person discovered when they dropped their MR Chase Visa credit card, as shown in this article
I really hate how these are calculated. We get rewarded with better scores, the more credit cards we take out because it shows we have more credit available. So wrong.
Perhaps but Fair-Isaacs (FICO) is the gold standard for credit rating
Interesting article. I didn't know why dropping a card lowered your rating. Are there other things that FICO scores are used for--e.g., employment apps?
Check it out online. Mortgage qualifications, car loan rates, even in some cases car rentals!
The key to a FICO score is the amount of debt you have compared to the amount of credit you have. It would not hurt you at all, for example, to dump a card with a credit limit of $2000-$3000 assuming you have other higher limit cards. Let's say, for example, that you have cards with limits of $15,000, $20,000, $3000, and $10,000. You would have a total credit availability (assuming you haven't used it) of $48,000. Eliminating a $3000 card would not affect your FICO score at all. However, if you eliminated the $20,000 card you would have cut your borrowing power almost in half. Worse, if you got rid of the $20,000 and $10,000 card your borrowing power would go down to $18,000 from its previous limit of $48,000; worse yet if you were using a substantial amount of that and had not paid it off.
No one can entirely figure out FICO and how it's calculated, but it is a well known fact that if you have a lot of available credit and usually pay it off monthly or regularly, your score will go up. Eliminating a high portion of your available credit makes you more risky. Go figure, I know. But I'd rather pay annual fees and keep an above 800 score than risk losing that. (And I do pay all my credit cards off each month, which is what makes rewards cards worthwhile.)
I do the same thing ProfChiara, I have many credit cards and pay them off each month so that I never incur an interest charge. And I take advantage of all the good bonuses available on the credit cards I decide to get..I too am confused why when you cancel a credit card, why that would effect your credit???
It's because your debt to credit ratio diminishes. So even if you owe nothing, your credit limit is lower.
Having me the Fair Isaacs folks I can tell you that their algorithms are statistically valid. The account for all kinds of credit behavior including the super payer who pays off huge balances every month. If you want to stay our of the credit drop soup, maintain a few cars, use them judiciously and pay them off each month, Remember the FICO score and your credit report has no idea what your income is so they rely on these observables,
Thanks, Prof. Do debit cards count in this mix? Also, my biggest (only) debt is my mortgage. I presume that this doesn't count in ratio we're discussing. Cheers.
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