Account, Will That Have Any Negative Impact On My Credit Score?

Q: I have a credit card account that I want to cancel. It's a Merrick Bank partially secured VISA card ($300 security deposit, $2,500 credit limit). I always pay the balance off in full each month whenever I use this VISA card, so I have a zero balance. I want to cancel it for two reasons. The first reason is that they insist on billing me $3.00 each month for the annual fee instead of allowing me to just pay one $36.00 payment for the annual fee. So, every month, even if I don't use my card, I have to mail them a stupid $3.00 payment for a bill that has nothing else on it. The second reason is that they just announced that they will now be using something called "electronic check conversion" when they receive a payment by check. They said that, instead of processing the check depositing it and having it go back through my bank, they will read the routing numbers and process the payment as an electronic fund transfer. My check will never go bank to my bank, just a debit note for the amount that was taken out of my account. Now for my question. If I voluntarily cancel and close this VISA card account, will that have any negative impact on my credit score?

A: In theory, no. You should have no adverse impact to your credit. The way your FICO score works is, you start with 850 points. Everybody gets 850 points as the baseline of credit worthiness. Then, the reporting agencies start deduction from that score and eventually arrive at a number that presumably describes your ability to manage your credit, and by extension pay your bills. The first thing they look at is your payment history. Do you have lates in the past 6 months, 7 to 24 months, or more than 24 months. The first category, 6 months, will hit you very hard, the next will hit less hard, and the last will have virtually no affect. Whatever they do here can amount to about 35% of the total reduction of your score. The next thing they look at is the amount owed as a percentage of the available credit. Let's say you have one card that gives you a total of 15,000, and you have managed to rack up 12,000 in credit debt. This will have a large impact. Now, lets say the same debt load is spread over 3 cards, each with an available limit of 7500. This would be looked at better because the amount of credit on any card in the second scenario is under 50%, but in the first scenario you are up to 80%. This category will represent about 30% of the reduction in your score. The next thing they look at is the age of the accounts. If you took the 3 cards from above that you have had for a long time, and rolled them into a single new card, your payments might go down because the new card is presumably at a better rate and this is why you rolled the balances over there, but your credit score would also go down for two reasons, one is that you are now at that 80% mark that I talked about earlier, and the second is that the new card is a new card. The new card company wants you to use their card, so they take your transfer balance and make available about 10% to 15% more, depending on their mood and your score. They set the limit just high enough to let you buy something, but not high enough that you can overextend. And, they will let you over extend if you have the balls to call them and ask for more credit. You can buy a new 27" TV from Costco without any trouble, but the 45" Plasma screen with the Home Theater stuff they have will probably run you into trouble. Newly extended credit will cause about 15% of the reduction in your score. The remaining reduction in your score will come from the mix of credit, mortgage, revolving debt, installment debt, car payments, that sort of thing, and the other reduction will come from inquiries - credit companies looking to see if you are a good credit risk. I assume that because you have a secured card, you have poor credit or you are very young and are just getting started building a credit profile. You need to get out of that secured card and get into one that is not secured. On a secured card, you put up , and that is what you get to spend. Perhaps the card company will take your 5,000 and add their own 2,500 to give you an available limit of 7,500, but of that limit, 66% is your own money, and they make sure that their contribution is always recovered first, so they charge you interest to use your own money. If I was extending more credit, and I looked at your secured card, I wouldn't take much stock in it - you are paying somebody to use your own money, and if you default, so what? It's your own money that you forfeit. I want a barometer of how well you will give me my money back, and whether you give your own money back doesn't help me very much to assess your propensity to pay me, or not. A secured card is a red flag in the first place, so lowering the red flag should only help you, not harm you.

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