How closing credit cards affects your credit score

If there are old merchant cards and other credit cards taking up space in your wallet, you may be tempted to close those accounts, since you don't use them anymore. However, that would be a bad move for your credit score. Even though you're not using them, those old credit cards are helping your credit score in a number of ways.





To better illustrate how and why those unused credit cards help, it's good to know how your credit score is calculated. Here's the breakdown on how credit scores are calculated:

Payment history: 35 percent
Amount of money owed: 30 percent
Length of credit history: 15 percent
New credit requests: 10 percent
Types of credit used: 10 percent

Those are the factors that go into determining your credit scores and the weight that each factor has in relation to the others. Now let's examine why closing inactive credit card accounts lowers your credit score.

The value of old credit

Those old, inactive credit cards you're thinking about closing are actually helping your credit score because length of your credit history is worth about one-sixth of your overall score. Not only should you leave them open and keep them helping your credit score, you might even want to use them occasionally so the issuer doesn't close the account for you.

Amount of money owed vs. credit limit

There's a term for this that lenders and credit bureaus like to use: debt-to-credit ratio. Your current credit balances, when viewed as a percentage of total credit, are 30 percent of your total credit score. Therefore, even though you're not using those credit cards, the credit limit on each of them is actually helping you lower your debt-to-credit ratio, which is a sign of responsible credit behavior. Keep those accounts active and working for you by using them occasionally.

Types of credit used

Although it's only 10 percent of the total credit score, every little bit helps. Those old credit cards are contributing to the different types of credit accounts in your credit history. Most people have several different credit cards or revolving credit accounts, and hanging on to your old ones is one way to cater to the credit-score formulas used by the credit bureaus.

Any one of the reasons listed above is a good reason to maintain those old credit accounts. However, when taken together and backed up with the facts, they're even more compelling. Even if you only use cards every now and then, credit and charge cards from merchants are important facets of your credit score and credit history. If you keep cards active, they may even save you money via better interest rates. Understanding the factors that affect your credit score and checking your free credit score annually, can put you one step closer to financial freedom.

Atlanta is No. 1 in credit card debt as overspending, recession collide

Rick Kearney has a credit card problem. A decade ago, he had 15 with a combined balance of $75,000.



Today he has four cards and $10,000 debt.

While that might look like someone slowly absolving himself of his credit debt, in truth the Duluth man remains deep in a hole, on a second wave of financial free fall. After declaring bankruptcy in 2001, the former home furnishings store owner had made headway in his credit card reliance, but he lost his job 19 months ago.

He's gone from using credit cards to fund his business to relying on them to finance his basic needs: groceries, utility bills and gasoline. He apparently is not alone.

In a recent report, credit information bureau Experian found Atlanta has the highest average balance among major U.S. cities, though it residents carry fewer credit cards than they used before. Utilization, or the percentage of money available in use, is at 33 percent, up from 31 percent in 2007, compared to the national average of 28.8 percent, said Michele Raneri, Experian senior director of analytics.

Kearney is a prime example for explaining Atlanta's unwanted credit standing. The first time, he overspent his means. The second time, he's fighting for survival.

"You feel like you’re a failure to your wife," Kearney, 56, said. "Feeling like a failure is huge.”

Credit experts say the combination of frivolous spending and economic desperation have led to the city's average card balance (including home equity lines of credit) of a nation-leading $6,753, which is a drop from $7,114 in 2007. The average card balance for 20 comparable cities is $6,105.

Atlanta's overspending horror stories are wide ranging, with most people too embarrassed or ashamed to publicly identify themselves. There was the local woman who continued to freely use a credit card for clothes, recreation and other necessities, even after her husband was laid off and they faced foreclosure with their house. Another area woman was buried after giving a second card to a business partner, whose spending spree left her with huge bills and damaged credit. Others spoke of maxing out credit cards with medical bills and opening new cards without hesitation.

The housing market collapse and unemployment surge helped elevate Atlanta to its No. 1 ranking in the Experian report, said Mechel Glass, director of education for the nonprofit credit counseling center Credability.

"It’s not in all cases frivolous spending; it's people taking care of necessities," Glass said. "They need gas to get to their job and food on the table, so they’ll use their credit card."

Furthermore, Credability's hardest-hit clients are paying their credit card fees before paying their mortgage. The reasoning is if they stop paying their mortgage, consequences won't hit for several months. Foregoing credit card payments quickly would cut off their ability to pay other bills.

Michael Rethinger, an Atlanta bankruptcy attorney, said most cases he's seen in the past two years involve people considering bankruptcy after divorce, joblessness or mortgage troubles.

"When you talk about credit card debt, people think it affects people who shopped a lot; that's not necessarily the case," Rethinger said. "The credit card debt I'm seeing is mostly people using their cards to survive when they are out of work."

Collette Craig, 47, a barber and Sandy Springs resident, relied on her credit cards to support family members when they arrived in Atlanta after Hurricane Katrina destroyed their home in New Orleans. She also used them to support her shop once business tailed off. At one point, she had nearly a dozen cards, with debt on two business cards totaling $40,000 alone.

Craig has reduced her card usage to eight and balance to $17,000, and is relying on Credability to help her become her debt free. "I'm on an extremely tight budget; I can’t even buy a peppermint," Craig said.

Unemployed for 19 months, Kearney, the former home furnishings store owner, is in negotiations for a sales management job that would help him escape his latest credit card calamity.

"Overall, and as a man, there's a lot of stress," he said. "The biggest stress is the feeling of not being able to provide for my family. ... I hate it. I just hate it."

Expert Says Bad Credit Score Doesn't Have to be Permanent

These days, small business owner Anonthy Smith is doing well at his New Clothing Store, Heavy's Clothing & Jewerly, but it wasn't always this way.

"I am a business owner, and there are ups and downs, and I had some downs, " said smith.

A bankruptcy in a poor economy pushed his credit score down, making it tough to get a loan. Smith made a comeback, though, and he just got a car loan to get a new Chevy Tahoe.

He says if he can fix his credit, so can you.


Rebuild Your Credit

Thousands are now seeing credit scores fall due to the forclosures, shortsales, and job losses.

Smith turned to credit repair expert G. June Washington, and saw his credit score rise 100 points in few months.

Washington suggests to first go for a consultation with a reputable credit repair firm that should be free. Washington's company is NCR Credit Plus, and they charge about $600 over several months to get your credit back on track. The next step, he says, is to develop a credit improvement plan.

"You have to make a detailed list of everything," Washington advised, "and an exact plan to pay your bills and keep the numbers correct to maximize your score."

Also, look for incorrect items in your credit report.

"You can fight those items in your report that are dragging it down and are not correct. It can make a real difference," Washington added.

Rebuild your credit by paying your bills on time, use only about one third of your available credit line, and keep accounts open after you pay them down to zero balance are a few other tips.

For a free credit report go to this site, www.creditkeeper.com. If you have had trouble with foreclosure, paying bills late, a shortsale or need additional advice, go to www.ncrcreditplus.com.