- Find a Real Estate Professional
- Realtors®
- Mortgage Lenders
- Home Improvement Pros
- Other Real Estate Services
- Review an Agent, Lender or Pro
- Marketing on Zillow
- Real Estate Agent Advertising
- Join the Professional Directory
- Popular
- Real Estate Market Reports
- More
Answers (6)
" Unlike "Bob", let's assume that credit utilization is very low for this consumer, they have 3-4 other active LOCs, and that this consumer LOC is the youngest among all of their open LOCs."
Assuming you have a low utilization with or without the LOC and it is not an established account, it will most likely have little effect on scoring. How little is not something I could comment on without having specific numbers and accounts to run it through a "what if" simulator.
I would guess that it's similar to a car loan that is closed upon payoff. What I have seen is that when one finally pays off a car note, (Let's say for $20,000) it may cause a temporary drop in credit score because the $20,000 high credit with a very low utilization just before payoff causes a sudden increase in utilization unless offset by other open and active accounts with close to zero balances.
Look at all your other active accounts and their high credit limits. Calculate your used credit on those then determine what it would be if you eliminate the unused credit on the LOC. If it puts you above around 50%, it may have an impact. The closer you get to 100% the more impact it may have.
You could always contact an experienced loan officer that can run it through a "what if" simulator for more accurate predictions. (Yes I know that using "accurate" and "prediction" is an oxymoron, so take that into account)
Assuming you have a low utilization with or without the LOC and it is not an established account, it will most likely have little effect on scoring. How little is not something I could comment on without having specific numbers and accounts to run it through a "what if" simulator.
I would guess that it's similar to a car loan that is closed upon payoff. What I have seen is that when one finally pays off a car note, (Let's say for $20,000) it may cause a temporary drop in credit score because the $20,000 high credit with a very low utilization just before payoff causes a sudden increase in utilization unless offset by other open and active accounts with close to zero balances.
Look at all your other active accounts and their high credit limits. Calculate your used credit on those then determine what it would be if you eliminate the unused credit on the LOC. If it puts you above around 50%, it may have an impact. The closer you get to 100% the more impact it may have.
You could always contact an experienced loan officer that can run it through a "what if" simulator for more accurate predictions. (Yes I know that using "accurate" and "prediction" is an oxymoron, so take that into account)
- Brady82
- Contributions:9
I appreciate everyone's prompt responses thus far. The consensus appears to be:
1) Not to close a LOC because it will only hurt your credit score due to impact on aging or apparent increased credit utilization.
2) Some activity on each LOC is important.
Clearly I mis-spoke earlier when referring to debt to income ratio.
This brings me to my follow up scenario & questions:
Are there any laws that govern how/when a creditor closes a LOC due to inactivty?
If the consumer LOC is specific to one company store/chain, and the consumer has no desire to add a transaction to the LOC each month to keep it "active" (e.g. "I don't need to buy furniture once a month"), then would it hurt a FICO score more to keep the LOC open with no activity or to cancel it?
After looking at http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx I am unsure how much of the 5 criteria would be impacted by either choice. Unlike "Bob", let's assume that credit utilization is very low for this consumer, they have 3-4 other active LOCs, and that this consumer LOC is the youngest among all of their open LOCs.
1) Not to close a LOC because it will only hurt your credit score due to impact on aging or apparent increased credit utilization.
2) Some activity on each LOC is important.
Clearly I mis-spoke earlier when referring to debt to income ratio.
This brings me to my follow up scenario & questions:
Are there any laws that govern how/when a creditor closes a LOC due to inactivty?
If the consumer LOC is specific to one company store/chain, and the consumer has no desire to add a transaction to the LOC each month to keep it "active" (e.g. "I don't need to buy furniture once a month"), then would it hurt a FICO score more to keep the LOC open with no activity or to cancel it?
After looking at http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx I am unsure how much of the 5 criteria would be impacted by either choice. Unlike "Bob", let's assume that credit utilization is very low for this consumer, they have 3-4 other active LOCs, and that this consumer LOC is the youngest among all of their open LOCs.
This is actually an easy one.
Closing established credit accounts will hurt your credit for 2 reasons.
1) Age of credit is an important criteria in the scoring model, if you close old established accounts it drops your score.
2) Credit utilization is an important criteria in the the scoring model, removing available credit will drop your score.
Example:
Bob has 3 credit cards each with $5000 limits.
Card 1 has a balance of $3500 and he's had it for 2 years
Card 2 has a balance of $3500 and he's had it open for 5 years
Card 3 Has a balance of $0 and he's had it open for 10 years
Bob's oldest trade line is 10 years old and he's using 47% of his available credit. This is a good position to be in.
Bob decides to do some Spring cleaning and closes Card #3 because he does not use it and rate is higher than the other 2 cards.
Bob's oldest trade line is now 5 years old and his credit utilization jumped to 70% thus dropping his score significantly.
Bob should have left Card #3 open and contacted the company and asked for a rate reduction competitive wit the other cards. If he could not get a better rate, he could have asked to remove any annual fees associated with the card so he could keep it open without cost.
Brady,
You flaw in thinking is that your income to debt ratio has anything to do with the scoring. The scoring model does not know how much you make, it just looks at available credit to used credit ratio as opposed to income to debt ratio.
Closing established credit accounts will hurt your credit for 2 reasons.
1) Age of credit is an important criteria in the scoring model, if you close old established accounts it drops your score.
2) Credit utilization is an important criteria in the the scoring model, removing available credit will drop your score.
Example:
Bob has 3 credit cards each with $5000 limits.
Card 1 has a balance of $3500 and he's had it for 2 years
Card 2 has a balance of $3500 and he's had it open for 5 years
Card 3 Has a balance of $0 and he's had it open for 10 years
Bob's oldest trade line is 10 years old and he's using 47% of his available credit. This is a good position to be in.
Bob decides to do some Spring cleaning and closes Card #3 because he does not use it and rate is higher than the other 2 cards.
Bob's oldest trade line is now 5 years old and his credit utilization jumped to 70% thus dropping his score significantly.
Bob should have left Card #3 open and contacted the company and asked for a rate reduction competitive wit the other cards. If he could not get a better rate, he could have asked to remove any annual fees associated with the card so he could keep it open without cost.
Brady,
You flaw in thinking is that your income to debt ratio has anything to do with the scoring. The scoring model does not know how much you make, it just looks at available credit to used credit ratio as opposed to income to debt ratio.
- Elaine Manfredi, "Elaine Manfredi"
- Contributions:39
It is usually in your best interest to keep the account open even though it's paid off. Closing out a card can sometimes hurt your credit. You should have at least 3 active trade lines on your credit report. You should also keep your balances to less than 50% of your combined available credit limits. Once you go above the 50% mark, it can have a dramatic negative effect on your credit score. I hope this helps. Best of luck!
- Cindy Quinton, "Cindy Quinton"
- Contributions:1332
It's hard to say for sure, since everything related to FICO is kept so secret. But I will say the forums on www.myfico.com are way better for virtually ANY credit related questions.
- Celia Butler Home Loan Diva, "At Academy Mortgage"
- Contributions:359
I can only tell you what I have witnessed, so personally speaking... "it very much depends on your objective. First of all, the factors that go into a credit score is mysterious and hard to know any exacts. Are you wanting a higher credit score for a mortgage, auto loan OR just exist with a high score?
Here is what I have seen...
Closing an account - flat out closing - especially if it is "aged" hurts the score for a period of time. LOC are issues with getting a mortgage - if they are left opened and are secured by properties you currently own.
Many consumers now keep their LOCs and use them ambitiously because they are so hard to come by and, like you said, a 0 balance on it usually makes the creditor close it.
~~~~
I personally believe that leaving a small balance on any account to purposely create a chain of activity is to your advantage. Always small balances are good (of course). Also I think that while 3 credit lines are great, if ever you want to age more credit you will have to start it up and if you are not doing any major financing at this time it might be a good idea.
I vote to always keep credit lines opened with certain reservations (member costs per yr etc) "
Sincerely,
Celia
Here is what I have seen...
Closing an account - flat out closing - especially if it is "aged" hurts the score for a period of time. LOC are issues with getting a mortgage - if they are left opened and are secured by properties you currently own.
Many consumers now keep their LOCs and use them ambitiously because they are so hard to come by and, like you said, a 0 balance on it usually makes the creditor close it.
~~~~
I personally believe that leaving a small balance on any account to purposely create a chain of activity is to your advantage. Always small balances are good (of course). Also I think that while 3 credit lines are great, if ever you want to age more credit you will have to start it up and if you are not doing any major financing at this time it might be a good idea.
I vote to always keep credit lines opened with certain reservations (member costs per yr etc) "
Sincerely,
Celia
Which yields a better credit score: Keep a paid off consumer LOC open, or closing it after payoff?
I previously heard it looks better if a consumer can request LOC closure instead of the creditor, but I have also heard that requesting an LOC to be closed has no or negative effect on a credit score (assuming that debt/credit ratio is not an issue). So from my previously ascertained perspective, this seems to be a conundrum.
If you are not sure either way, any credit score approximation web site or other resource you could direct me to would be greatly appreciated. Please assume that the consumer's only reoccurring debt payment is toward a mortgage, which is 20% of their take home pay, and the little credit card charges that are made are paid off every month. So the debt to credit ratio is less likely to be an issue.
I ask this question because I had a consumer LOC that I paid off after 3.5 years on a zero interest deal, and then it remained inactive for 2.5 years before the creditor closed it on their own. If I open another relatively small consumer LOC, I just want to ensure that I end it on the most favorable terms possible instead of being surprised when my creditor closes my consumer LOC.
I suppose getting a non-consumer LOC (Visa, MC, etc) with 0% APR may be possible with some retailers, but I would prefer to avoid that route because I already have 3 long established credit cards.
Stating a discriminatory preference in an advertisement for housing is illegal. If you think this content is discriminatory or otherwise inappropriate and feel it should be removed from Zillow, please let us know by completing the information above.
We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.