Credit Mistake: When Closing Accounts Is A Bad Idea!

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It's a common misunderstanding that you only have one credit score.

If asked, most people will give you their 'credit score'. In fact you  have at least three or more scores and these scores can vary widely. How can this be?

There are three major credit bureaus in the United States that develop credit reports and calculate FICO based credit scores. They are Experian, TransUnion, and Equifax but there are also a number of smaller credit reporting companies keeping tabs on your credit and reporting scores. 

To make things even more complicated for us, some of the larger financial institutions  calculate their own credit risk scores based on information in your credit report. So, when repairing your credit score, you should focus on just the lowest FICO score rating number first.

Here's what I mean.

Contact the three major credit bureaus, find your lowest FICO credit score being given among them, and work on repairing that credit score first. Actions you take here will positively impact the other two major bureau scores and automatically raise your average score. 

Our score is over 800. Our lowest credit score among the three major credit reports is 800, the highest is 830. Our average score, then, is 815. When we shop for credit we use the average of 815 when getting quotes from potential lenders.

By the way, we never give potential lenders our Social Security number when shopping for credit. We only give them our average FICO score to work with. This prevents your score from being lowered by too many inquiries.

So, what can you do to adjust your lowest credit score but not damage it in the process? 

First of all, don't make the mistake of closing too many of your credit accounts thinking this will improve your score.

This may not make much sense so let me explain it.

First, you might inadvertently close an account you might need. If you need credit in an emergency, you will have to reapply for credit. All those new inquiries from lenders will cause your credit score to actually drop.

Secondly, most credit bureaus give high favorable FICO points to those who have a solid long-term credit history.

This simply means that closing a credit card account you have had for years may actually hurt you in the long run. If you have newer credit card or store accounts that you no longer need or if you have too many credit lines open, then you should pay off some of them and close them. Doing this can certainly help your credit score but, remember, try to keep one or two older accounts open in case you need new credit. 

There is one case where closing your accounts can be a bad idea.

Closing your accounts could make your overall debt-to-credit ratio too high.

For example: Let's say you have available credit of $20,000. $10,000 of that is still available from credit cards that have no balance owing and $10,000 is being used on accounts with a balance owing. If you close some of the accounts with zero balance that have several thousands of dollars available to borrow, you have wiped out some available credit and reduced the margin between what you owe and what you can borrow.

Here is the rule: Your used-up credit should never be more than 50% of your available credit. The less your available credit, the more damaging to your credit score. So, in this case, closing accounts will actually lower your credit score. Keeping a good debt-to-credit ratio makes it appear that you really don't need credit and makes you more attractive to lenders.

There is another urban legend that damages credit scores. It is the idea that you can do only one thing and it will magically boost your FICO credit score a specific number of points.

Debtors are led to believe that paying off a just one credit card bill will boost their credit score by 50 points while closing one unused credit account will result in a gain of 20 or more more points. I can tell you from first hand experience that FICO scoring is mainly a mathematical mystery and gimmicks like these just will not work.

How much of a gain any one action will affect your credit score is impossible to determine accurately. It depends upon several factors, including your current credit history and the credit bureau using that history in calculating your credit score.

It is true that, the higher your credit score, one unpaid bill or an account closed can affect you. It's just not possible to attach specific points to each action. The best approach, when repairing your credit score, is to not assign numbers to specific credit repair actions.

The only sensible approach is to do the correct things to get your FICO credit rating as close to 800 as possible. If you need a number target, do the right things to improve your FICO score by 100 points or more, and you will qualify for all the credit you need at favorable interest rates.

Forget the myths and do what works!

Jim DeSantis says: Raising your FICO credit score to 750 or more yourself is easily done. Get the information you need here ==> FICO Credit Score Fixed or here ==> Fix Your Credit Report

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