Bailout

It?s OK to close expensive credit cards

By Felix Salmon

I’m a big admirer of David Lazarus, of the LA Times, but I think he was a bit credulous on Monday when he complained about the downside of closing credit cards.

He’s right to slam Citigroup, of course, for slapping a $60 annual fee on a lot of credit cards which had previously been free. But many of those cardholders have the option of transferring their balances somewhere without such a big fee, and closing the newly-expensive Citi card. And that’s exactly what they should do. This part of Lazarus’s article is, I think, misleading:

So close down the account. Easy, right?

Not exactly…

Linda Sherry, a spokeswoman for the advocacy group Consumer Action, said canceling an older card that reflects long-term creditworthiness can indeed have an impact on your credit score.

“You might see your FICO score go down by as much as 100 points,” she said.

The FICO website is helpful on this front, and does say that closing credit cards might not improve your FICO score, since it’s likely to decrease your total available credit and therefore increase your credit utilization ratio.

But Craig Watts, director of public affairs at FICO, emailed me this statement:

It is extremely unlikely that closing a credit card could reduce anyone’s FICO score by 100 points. Closing a credit card may have no effect at all on a person’s score, or it may cause their score to lose points. Any change in score is caused by other information that is present on the person’s credit report, particularly the level of the person’s balances on other credit cards compared to those accounts’ credit limits.

In other words, if closing one card means that you’re much closer to maxing out your remaining cards, then your score might lose some points — but it’s very unlikely to go down by a quantum as huge as 100 points. Your credit utilization ratio is part of your FICO score, yes, but it’s not that big a part.

Full post as published by Macroprudential on March 11, 2010 (boomark / email).