Dear Credit Guide,
I used to have excellent credit. But in 2005, my credit score got down to 500 after my divorce. In 2006, I applied for two credit cards with $300 limits to rebuild credit. Then in 2008, I applied for another with a $500 limit. I’ve never been late, and my score went up! In 2010, I was approved for six more department store credit cards with higher credit lines. I spent under $200 each time I used the department store cards, and I always paid them off in a few months. Right now, all cards are paid off, and my total credit line available is $8,000.
My score is now 695. I would like to cancel and close the high-interest cards, including the original three from 2005/2006, which have annual fees. The department store cards don’t have annual fees, but do have high interest rates. I’m getting an actual credit card through my own bank now and an “airline mileage one” at 15 percent interest (compared to 24 percent on all those others) with no annual fee.
I will be applying for a mortgage loan possibly within six months. Right now, my seven department store cards, plus the three original ones and the two new ones, are too many. I would like advice as to which ones I should cancel and close. The first three with fees? Or any of the seven department store cards? Please contact me asap before I call and cancel all of them. I kinda went overboard applying and am so happy that I’ve rebuilt in 5 years, but don’t wanna mess with the 695 score. Thank you! Shari
Your letter evokes those dreaded math class word problems! (Phil has a bag containing 12 gum balls: six green, four yellow and two red. If he were to dip his hand in the bag three times, what is the probability of him pulling out a yellow ball … )
It’s time to simplify, Shari. Lets begin with what you most hope to accomplish: qualifying for a mortgage with the very best rate and terms. To do that, you’ll have to have a few things in place, including a stable income that’s more than enough to cover the monthly loan payment and a FICO score that’s firmly in the 700s.
I don’t know where you are with your cash flow, but your credit score is actually quite good. In fact, I congratulate you! Clearly, you’ve worked hard to rebuild after a difficult time. And obviously, you do not want to do anything that will jeopardize that effort.
Your instincts about not closing the older cards at this juncture are correct. Keeping them active will be to your scoring advantage. While I understand that you’d rather not pay the annual fees for the original three, if you can manage them until you’re ready to apply for the home loan, that would be best.
Now, give those credit scores a boost. It won’t take much. In fact, it’s basically just doing what you have been doing:
1. Don’t open any new lines of credit (just in case you spy an offer that looks too awesome to refuse).
2. Charge with the two newer cards regularly to establish a healthy history with them.
3. Maintain a zero balance on all the cards.
4. Make all of your payments on time.
Keep this strategy up, and you’ll create the score of your (and your bank’s) dreams. Check your credit reports from all three bureaus for any errors right now too. If you do spot any problems, you’ll have a luxurious six-month window to clear them up before the lender sees them. It will prevent you from having to go through the dispute process at the last minute.
That should be enough to prep your scores for the home loan. After it’s secured, you can begin to whittle down the plastic if you like. Remember that having all of those existing accounts open won’t harm your scores, but now that you’re such an excellent cardholder, there is no reason to pay for expensive starter accounts. Contact those companies and request they drop the fees (for such an impressive customer as you, they might). If they don’t, go ahead and close the accounts. Your scores may dip a bit, but it won’t be dramatic, and you’ll have already got what you wanted — the sweet home loan — out of them.
Regarding the retail cards — well, seven is certainly more than average, but the number is not harmful. Either remove the excess cards from your wallet and store them in a safe spot in your home or close them altogether. Personally, I’d do the latter. With the rewards cards and just a couple of store accounts, you should have all the plastic you need to shop and maintain a superb borrowing and repaying history.