Editorial Policy

Too Many Credit Cards? How to Downsize

Erica Sandberg

August 7, 2012

QDear Erica,

How can I terminate a credit card (in good standing) without that action showing up on my credit report as being a negative factor on my now excellent credit rating? I want to end up with only one card. I now have five. — Dave

AHi Dave,

I sense a blockbuster in the making — Terminator 4: The End of the Credit Card. Start thinking about who will play you now!

OK, maybe not. As a cardholder, you have the right to permanently close any of your accounts, with very little drama. To do it, however, you’ll probably have to delete any balances that you have on them. That makes sense because an account is considered active when you owe money whether you’re charging or not. The credit card company is still calculating interest and sending bills, after all. Therefore, if you’re carrying any debt on a card, concentrate on paying it down to zero. When you do, you’ll also see the benefit of a credit score increase.Ask Erica

That leads us to what happens to a credit report and score when you close an existing account.

The credit issuers will report the change in status to the three major credit reporting bureaus — TransUnion, Experian and Equifax — and will specify that the accounts have been shut down by you. There is nothing bad about that, because it’s your choice to have or not have the card. If the credit issuer cut you off, though, it is generally perceived as negative because the assumption is that you’ve mismanaged the account. Think of it this way: It’s the difference between resigning from a job and leaving with good will, or being fired because you’ve done something wrong.

As for your credit scores, there may be a slight change. Mathematical models take the data on a credit report, weigh some information more or less heavily and then shoot out a score that rates your borrowing risk level. For FICO scores, the numbers range from 300 to 850, and higher numbers are an indication that you’re a better lending risk.

The most important factor in a FICO score is payment history, at 35 percent, and the next is amounts owed at 30 percent. Then comes length of credit history at 15 percent and types of credit used and new credit (inquiries you make), both at 10 percent.

So where does closing an active credit card fit into the scoring puzzle? It falls under types of credit used, which is clearly a minor factor when compared to sending your payments in on time and keeping yourself out of debt. It also falls under length of credit history, if the card you choose to close is one of your oldest accounts. In that case, canceling several of your longest-held cards would make your credit history look shorter and could ding your score. However, those accounts stay on your credit report for several years — even if they are closed.

Most importantly, however, is when you close a card, you reduce the amount of your total available credit. So, if you choose to close them, make sure you do not carry a balance of more than 30 percent of your total available credit on your remaining card.

In other words, yes, closing a card can have an impact on your credit score (FICO doesn’t publish exactly how it comes up with its numbers). But if you continue to charge and repay responsibly with the remaining card, you should be fine in the long run.

I fully understand wanting to simplify a credit management system. If you want just one card in your wallet and that’s all you need, start calling the extraneous accounts and bid adieu. Yet before you whittle down your credit portfolio to one card, think about your needs first. The plastic you keep should have enough of a credit line to see you though any upcoming purchases, and you should be able to use it at a wide variety of places. In general, it’s best to have a fallback card, in case of theft or account problems. But that’s your decision.

Oh, and to keep your credit rating up, no matter how many cards you have, just charge regularly and repay the balances on time and in full. It’s a plot that wouldn’t sell movie tickets, but it will help you streamline your finances.

Got a question for Erica? Send her an email.