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