Credit scores remain all the rage, but there are a lot of misconceptions out there. Four common ones are outlined in this MSN Money article titled ‘4 Credit-Scoring Myths‘. What’s the first myth? That closing credit cards will help your score.
No, no, no. For the umpteenth time: Closing accounts can never help your credit score, and may hurt it… It?s true that having too many open accounts can hurt your score. But once you?ve opened the accounts, you?ve done the damage. You can?t repair it by shutting the account, and you may actually make things worse… The credit score looks at the difference between your available credit and what you?re using. Shut down accounts, and your total available credit shrinks, making your balances loom larger, which typically hurts your score.
Other un-truths mentioned are that checking your credit score hurts your credit, that credit counseling is as bad as bankruptcy, and that you only have one FICO score.
I personally never cancel any of my cards. According the quote having too many open accounts can hurt your score, but I’m not exactly sure how. In my previous post on What Makes Up Your FICO Score?, that’s not listed as a criteria, although it asked as the first question in the Free FICO Score Estimator from myFICO. But I think that question is trying to address credit history length. If it is part of the FICO formula, I think it’s a small part of the score, ’cause I’m now near 20 credit cards and haven’t seen any problems yet. I’m also keeping my debt-to-limit ratio low.
But how to do keep track of all those old cards if you shouldn’t cancel them? I keep a virtual eye on all my inactive cards with Yodlee. As an example, last year I caught this fraudulent charge on a card which I hadn’t used in years. Called it in the next day, and it was all taken care of.
As for opening credit card accounts (for the lovely perks), here’s what she says (and agrees with my own experiences):
For most people, one inquiry will generally knock no more than 5 points off a score (and scores typically run from 300 to 850, so that?s not a big percentage).