Some pretty good advice.

Motley Fool
Don't Cancel That Card!
Thursday March 3, 7:29 am ET
By Dayana Yochim

It's probably safe to say that those credit cards stashed snugly in your wallet aren't the only ones on your official record. So should you close those 18 open lines of unused credit listed on your report? Will removing old information about already closed accounts make you look more attractive to bankers?

Closing accounts will not undo anything. According to Fair Isaac & Co., once you acquire more than seven revolving debt accounts, your FICO score begins to suffer a little. However, all is not automatically forgiven by simply closing accounts to get below seven. Once you've opened the accounts, the damage is done.

Closing open accounts may actually hurt your FICO score. Lenders take a hard look at the ratio between the balances on your revolving accounts and your total available credit. If you do have debt, try to keep it to less than 30% of your available credit. (The ideal number here is, of course, 0%. Here are some tips to get you debt-free faster.) Go ahead and keep those lines of credit open (but don't be tempted by untouched lines). When you close open accounts, those credit lines are no longer factored into your ratio. Thus the percentage of debt to available credit will increase. Ouch.

Why deny the good? Removing old closed accounts that don't have any negative items is a bad idea simply because you benefit from a long credit history and those accounts speak to that credit history. (Remember, 15% of your credit score is determined by how long you've been borrowing. Here's how the rest of it is measured by The Man.)

Your lender may have a different perspective. Lenders are apt to penalize you for having too much available credit, fearing you'll snap one day and go on a spending binge that is well beyond your means. If this is an issue with your lender, you might want to talk about closing some accounts, as long as the lender also knows that your score could drop.

On the other hand, there's beauty in simplification. Consider the benefits of paring down:

Simplicity. Fewer cards are easier to track. In addition, you have a much better sense of your overall debt level when it's on one or two cards rather than spread across a bunch of them.

Less temptation. The more cards you have, the easier it is to rationalize excessive spending. But remember that your card's credit limits are not an indication of what you can afford to spend. Fewer cards with lower balances is your path to enlightenment (or at least peace of mind), grasshopper.

If you decide to streamline, carefully consider which cards should go on the chopping block. (Here's some guidance.) You might sleep more soundly at night knowing that the only credit in your name is what's snugly in your wallet on your nightstand.

 

 

If you go to your local bank, sit down and apply for a home equity, personal or auto loan...your score will not matter(95% of the time). Fair & Isaac are not lenders and there are more cons than pros to their methodology.

A lender could give two squirts if closing cards will lower your score...they are worried about the risk involved with the transaction. Anyone with common sense knows that less cards/debt is better. How FI can justify a higher score with MORE debt is beyond me, but they are essentially training people to think that way.

So, you can trick FICO into thinking you're a low-risk candidate for a loan, but a lender still has eyeballs & a calculator People need to worry more about their credit being paid as ageed/not over-extending themselves and stop worrying about their score.

Good Example: Person has 3 cards with $10K limits...has $7K on one card. According to FI method, his score would take a hit because his balance/limit ratio is high...While another guy has 7 cards(their magic number) with $30K in limits and 25% balance on each card, his score would be higher(assuming everything else equal). Any lender worth his salt would have some of those cards closed before they lent the second guy a dime.

 

Pretty good finance wizardry for an unemployed pizza dude.

 

Mortgages, which are secured loans, tend to be a bit different than some, because the downpayment amount will have a big influence on how you are able to qualify. Bigger downpayment = lower risk, regardless of your score.

Most other loans (including cars) will look at FICO and little else. Most of them have cutoffs for various score levels. At Honda Finance it's 670 minimum if you want the best available rates. At most banks it varies between 680 and 720, below that you are charged a "higher risk" rate.

The methodology doesn't seem to make a lot of sense, but it does work, because usually people tend to follow fairly regular patterns. People who have a lot of credit and don't use it tend to continue that responsible pattern. People who use all their credit tend to continue doing that. Certainly there are risks: Something could happen and you could suddenly go wild, or (on the flip side) you could suddenly hit the lotto, pay your debts and never run a balance again. But these are the exceptions to the rule. Fair Issac -- and the lenders who use their services -- generally will go with the best statistical probability, which is that your past behavior is a good indicator of your future behavior.

 

When you apply at a dealership, they will look heavily at score...but not when you walk into your local Savings & Loan on the corner. Different animals altogether, just as purchase-money mortgage lending is handled in a different manner than the second mortgage process.

And while there may be plenty of evidence that supports F&I's generalities, there are still too many loans that require a human intervention. That's why scoring is used mainly(aside from the credit card industry) for pricing and less for actual decisioning...and probably always will be.

 

Well...I took a small hiatus from throwin pies and spent 10 years in the back offices of a few banks...

But...pizza will always be my first love... ahhhhhh