Expert Q&A Archive
If you don't have a balance on your credit card, should you keep it open?
In order to keep your credit score high, if you have a credit card with a zero balance that you donít use, what should you do? Iíve heard that if you keep it open, it actually looks good on your credit score because you donít have a balance on a card. But then I've also heard that you should just close it. What do you think is the best?
Bettye J. Banks:
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My favorite answer to almost any question is - it depends. Your credit score is a moving target. Every time you make a purchase or payment your score changes. Your debt ratio (credit utilization) should not exceed a composite of 30-50% of your open accounts. The explanation below is one I wrote for inclusion in our Credit Workbook.
How do you know your Debt Ratio?
This very simple process can help you to understand. Assume you have three major credit card accounts. Each has a credit limit of $5,000. This means you have a total credit limit of $15,000.
Account #1 has a balance of $5,000.00 and has reached its credit limit. On the surface of it, this appears pretty bad because you have reached 100% of your credit limit (Credit utilization = 100%).
Account #2 has a balance of $2,500.00, or one half the allowable limit. Thatís not too bad, because it is 50% of the available credit you have, but leaves your ratio too high on the first two accounts. (75%)
Account # 3 has a $0 balance. Thatís great! When we add the third account, the composite of the three accounts is only $7,500.00 or 50% of your maximum credit limit.
At 50% of your credit limit you should consider this a caution zone. Take steps to manage or reduce the ratios. DO NOT charge anymore! You should maintain a comfortable range of about 30-40% of your available credit.
A debt ratio of over 50% can cost you points on your credit score. Your debt ratio equals about 30% of your credit score. Your credit score is a moving target and a snapshot at any given time! It changes as your payment behavior changes and as your balances increase or decrease.
Step 1: Add up all of your credit limits. (All retail and bank card accounts.)
Step 2: Add up all of your balances on these accounts.
Step 3: Divide your balances by your credit limits. This gives you the ratio.
Remember that some old unused accounts with a $0 balance are not necessarily bad, if you had a good pay record with them, because they improve your debt ratio. Close any that you intend never to use again as long as they do not increase your debt ratio. Multiple open accounts can get you into more trouble than you can get out of in a lifetime if you do not proceed carefully. Look at your debt-to-income ratio (Page XX) as a better indicator of your ability to manage credit well or acquire additional accounts. Maintain your ongoing regular payments, and keep your debt-to-income ratio at less than 15-20% for ease in servicing your credit obligations.
Michael A. Masiello:
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The concern with open credit is it could help/hurt you based on entire credit picture, some lenders count it against you as it represents additional credit you could use, thus adding more payments to your cash flow. It's my opinion that the best strategy with credit is to use it responsibly, pay bill on time, pay in full and don't carry or use more than you can handle. Dependant on source usually no more than 15-20% of wages - many good sources available via the web for additional information.
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With traditional FICO scores, there is no benefit to your credit scores to close accounts you donít use anymore. They donít count against you, and they may help, especially if they are older established accounts. Under the new Vantage Scores (which are fairly new and not yet widely used), having too much available credit can hurt your score.
Unless you have a co-signer on the account who may run up charges you will have to pay, or the card issuer is assessing an annual fee you donít want to pay, Iíd recommend you leave the account alone.