Why you should almost never shut down a line of credit

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With the flood of great credit cards offers in the marketplace, people have been asking me: What impact does opening a new card have on your credit score? I’ve got answers and guidance for you.

The credit card lending in our country has gone through three waves over the last seven years. The first phase was typified by what I call “pulse approvals” — basically if you had one, you got a card!

Then we went to phase two during the financial crisis of 2008 and 2009. At that time, lenders cut lines, shut off cards and changed terms and conditions to make customers go away. They were not looking for new business.

Now we’re in the third phase. Credit card companies are again begging for customers, with one difference: Instead of lending to anybody who has a pulse, now they’re only looking for customers who have credit scores in the 700s or 800s.

Inquiries for new lines of credit stay on your credit report for 24 months. But only those made in the last 12 months impact your credit score negatively under the FICO scoring model.

When you get a solicitation for a card that’s so good — I’ve heard of some offering $300 cash back right away or two free airline tickets just for signing up — people are tempted to jump at it and shut their old cards down.

Do not close the old accounts! Thirty percent of your credit score is based on your available credit.

So let’s say you have a credit card with a $10,000 limit. Then you get a new card that has the same limit. If you keep both the old one and the new one open, instead of shutting down the old one, you now have available credit of $20,000, instead of just $10,000. That extra $10,000 in available credit that you have sitting there untapped can really boost your credit score.

The only exception to this rule is if you’re talking about an old card that has a significant annual fee. In that case, I recommend you close the old card after you get your new card.

I’ve been monitoring the credit card offers that have come pouring in for my wife. The most popular offer right now is one that trumpets up to 5% cash back. But when you read the mice type, you see there are rotating categories of purchase that qualify, caps on the cash back and other restrictions.

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You want a card that’s straightforward. No gotchas, no gimmicks.



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