Don't Have A Credit Card?

You may have heard that “too much available credit” is a bad thing so you should close out your unused cards. 

Let me tell you a story.  Back around 1992 or so, a friend of mine got married and they were looking to buy a new house.  She had a few bad things on her credit history that needed to be cleaned up before they could get a loan.  One of the things the bank told them was that between the two of them, they had too much available credit and needed to close some credit cards.  Back then, banks thought having too much credit available at your finger tips would lure you into racking up credit card debt, thereby getting behind on your bills and you’d be unable to make your mortgage payments.  Profiling, is what it was.

That’s why I personally thought having too much available credit was a bad thing.  After all, they got the information straight from the bank.  Well, times have changed.

Turns out having “too much available credit” is only bad for yourself if you have uncontrollable spending habits, max out all your cards, and can’t make your payments.  Yea, then it’s a bad thing.

Credit Score Facts

• The FICO scoring system has NO such reason code as “too much available credit”.
• Closing unused or paid off credit cards is a BAD thing because it reduces your available credit.  Why is that important?  Because having less credit available INCREASES your debt-to-available credit ratio.  If you have $50,000 in available credit and owe $4,500, your ratio is 9%.  Now close a few cards and bring your available credit down to $20,000 and you just increased your debt-to-available credit ratio to 22.5%.  Closing out cards works against you.
• The FICO formula does NOT look at your income, it only measures your debt.

Ok, now what happens if you get pissed off at your bank or credit card company and close your credit card?  Let’s take a look.

• Closing older cards, ones you’ve held for years, is not a good idea.  Because the card is no longer active, you’ve just slashed “x” number of years off your established open credit line and now your credit history will appear to be shorter.
• I said the FCIO formula does not look at your income, however when you apply for a new card the lending agency DOES look at your income so they can evaluate your debt-to-income ratio.  If you lose your job you will NOT be able to get a card EVEN if you still have an excellent FICO score, because you have no income.  I learned that one the hard way.

In Summary

Keep those credit cards open, especially during this horrible economy.  You never know if you’ll lose your job, at which point you will be unable to get new cards.  If you don’t want to use them, then just stash them in a safe place, but do NOT close the accounts.