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Dear Quentin,
I’m a 67-year-old widower with a credit score of around 800. I’ retired and live off of Social Security of $1,440 a month. I live rent-free, and my car is paid off. I pay my credit cards off each month. About 18 years ago, I went bankrupt for the second time. To re-establish my credit I got not-so-great credit cards. Today, however, I have other credit cards with no annual fees and much lower interest rates.
The trouble is I have about 14 credit cards, and I want to get rid of about 10 of them. The average age of my cards is around eight years. I don’t use most of the cards, and I don’t want to pay the yearly fees. How do I go about getting rid of the cards? I know that getting rid of them will cause a temporary hit to my credit score.
Can I do it over time? Your help in this matter would be greatly appreciated.
Too Many Cards
Dear Too Many,
Before you cancel the unused credit cards, see if you can cancel the annual fees. But your instinct is a good one. Too many credit cards are a lot to manage, and could leave you vulnerable to identity theft and credit-card fraud.
Closing your credit cards will hurt your credit-utilization ratio — that is the ratio between your credit-card balance and your credit limit. It is important to keep that ratio low, so make sure that you carry a zero balance on any card that you cancel. Generally, however, most experts recommend keeping your credit-utilization ratio below 30%.
“Generally, a low credit-utilization ratio is considered an indicator that you’re doing a good job of managing your credit responsibilities because you’re far from overspending,” according to Experian. “A higher rate, however, could be a flag to potential lenders or creditors that you’re having trouble managing your finances.” But with many cards this score is also aggregated.
The three main credit bureaus — Equifax EFX, +1.29%, Transunion TRU, +2.18% and Experian EXPGY, +1.44% — also take the length of your credit history into account. Closing your accounts would obviously impact that. It varies by credit bureau. For instance, a FICO score has five categories: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and credit mix (10%).
Before closing accounts, redeem your credit-card points and miles, and make sure that there is a zero balance on these cards before canceling them. Keep any cards that don’t have an annual fee so you don’t hurt the duration of your credit history. A card with a high credit limit is also worth holding on to.
Be strategic about which cards you choose to close. “Check your credit report to identify your oldest credit-card account and plan, in most cases, to keep it open,” Experian advises. “That’s also a smart idea when the card you’re considering closing has a high credit limit and canceling it would greatly reduce your amount of available credit.”
This is especially true if you are planning to take out a loan. If you have a bad credit score and you are planning to buy a car on credit, or take out a mortgage, this could obviously mean you are refused the loan, or you end up paying a higher interest rate. The good news: From what you say, it does not seem like you are planning to take out a loan anytime soon.
You don’t seem to have a diverse credit mix — given that you don’t pay rent or a mortgage and your car is paid off — but that’s a relatively small part of your overall credit score. It usually takes three to six months for your credit score to recover. You could cancel approximately three cards per month for six months. I suggest canceling the cards that are costing you the most in fees.
“Closing 10 of your credit-card accounts seems extreme unless you believe that the annual fees involved are causing a hardship for you,” Mark Hamrick, head of Bankrate.com’s Washington, D.C., bureau. “Perhaps you might explore with those providers whether they have some cards with no annual fees that you could convert them to. That feels like more of a win-win to me. You can maintain creditworthiness and access to credit, should you need it in the future.”
Your credit score should be fully recovered a year from now, or less. Good luck with managing your finances going forward, and keeping your credit utilization low, and maintaining a long credit history. This will be crucial if you require any kind of loan over the next few years. The best time to take a hit to your credit score is, of course, when you don’t actually need it.
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