Q&A: Card closure reasons don’t matter

Dear Liz: Does the reason for a credit card closure affect credit scores? I’ve had retailers close a card simply because it hasn’t been used for a period of time, not because I mishandled the account.

Answer: Credit score formulas don’t distinguish between accounts closed by the consumer and accounts closed by the issuer. The closed account can still ding your scores, but you won’t suffer an extra blow because the decision to close wasn’t your own.

Q&A: Is it possible to have too many credit cards?

Dear Liz: I have accumulated too many credit cards, sometimes to get bonus frequent flier miles. The frequent flier miles cards all have annual fees. I always pay cards in full each month.

My credit score is 800-plus every month. I have heard that your credit score is dinged when you close credit accounts. Is that true and by how much? How do you recommend reducing the number of credit cards?

Answer: Yes, closing cards can hurt your credit scores. The “how much” question is impossible to predict and will depend on your credit situation as well as how you go about reducing your card portfolio.

Keep in mind that there is no such thing as “too many credit cards” as far as credit scoring formulas are concerned. As long as you pay your bills on time and use only a small portion of your available credit limits, you can have lots of cards and great scores.

However, monitoring a bunch of different cards can be overwhelming. You also don’t want to keep paying annual fees for cards that aren’t delivering sufficient benefits.

If the fees are your primary concern, identify the cards you want to close and ask the issuers if you can get a “product change” to a no-fee card. This typically won’t affect your scores because the account is simply being transferred rather than being closed and reopened.

If you need to thin the herd, be aware that credit scoring formulas are sensitive to credit utilization, or the amount of your available credit you’re using on each card and overall.

If you have multiple cards from the same issuer, ask if the credit limit from the card you’re closing can be added to one of your remaining cards. Another option is to close only your lowest-limit cards.

You won’t want to close any cards if you’ll be looking for a major loan, such as auto financing or a mortgage, in the next few months. Hold off until after you’ve got the loan.

Also try to use up or transfer any points or miles you’ve earned on the cards you plan to close because those rewards may disappear at closure.

Q&A: Should you close a credit card?

Dear Liz: You recently wrote about how closing credit cards can hurt your credit scores. I’m wondering what impact closing a business credit card would have on my personal credit score.

For many years I have been working in the film industry under contracts with my personal services loan-out company. My company has two credit cards, including a travel rewards card with a hefty annual fee. This card has been useful to me because my job involved a lot of international travel. But as I’m now nearing retirement and traveling less, I’m considering closing that account. Will closing the card affect my personal credit scores?

Answer: The answer lies in your credit reports, which you can view for free at AnnualCreditReport.com. (Type that address into your browser rather than searching for it, because the top results are likely to be sites that want to charge you for credit monitoring. If you’re asked for a credit card, you’re on the wrong site.)

Typically, business cards don’t show up on personal credit reports and thus won’t affect your credit scores. But check to make sure.

Before you actually call to close the card, however, you should know that the company probably will want to keep your business. You may be offered a hefty wad of rewards points as an incentive to keep the account open. The points could be worth enough to offset some or even all of the annual fee.

Also, review all of the benefits the card offers. Many premium cards offer various credits to offset the fee, and not all of them are related to travel. Even if those aren’t enough to entice you to keep the card, you may want to use the credits before shuttering the account for good.

You also may have the option to swap your card for one with a lower annual fee, something known as a “product change,” so you’ll also want to investigate whether one of the issuer’s other cards might be a better fit.

Q&A: Closing credit cards could hurt scores

Dear Liz: If I have a few credit cards, why would my credit be negatively affected if I paid off and closed some?

Answer: Your credit scores won’t be negatively affected by paying off your card balances — quite the opposite. Paying off debt improves your credit utilization — the amount of your available credit you’re actively using — and that’s a powerful way to boost your scores.

If you close accounts, however, that would reduce your available credit, and that’s bad for your credit scores. That doesn’t mean you can never close a credit card, but you should do so sparingly and try to keep open your cards with the highest limits, if possible.

Q&A: Don’t close that credit card

Dear Liz: I’m debt free with a comfortable income and excellent credit. I just got a new cash-back credit card. I have three other credit cards, including one affiliated with a retail chain that I no longer use. Should I close the retail chain card so I only have three cards? Should I have fewer?

Answer: More is often better when it comes to your credit scores. The scoring formulas may temporarily drop a few points when you apply for a new card, but having at least four active credit accounts can help you achieve and keep high scores.

The formulas won’t punish you for having too many accounts or too much available credit. You could get dinged, though, if you use too much of that credit at one time. To avoid that, try to keep your balance on each card below 10% of its available limit.

Q&A: Establishing credit without debt

Dear Liz: My wife and I are retired. We have always paid our credit card balances in full each month and have zero debt. A banker recently advised us to establish credit and make timely monthly payments in order to maintain a high credit rating in case we need to borrow in the future. I feel uncomfortable taking money from our investment portfolio to service debt, but I also wish to maintain our high credit rating.

Answer: You don’t need to take on debt or carry credit card balances to have good credit scores. Using a few credit cards lightly but regularly is enough.

Taking out an installment loan can help boost your scores if you’re trying to repair troubled credit. You also may need an installment loan on your credit reports if you want the highest scores possible. But the highest possible scores only give you bragging rights, not better rates and terms on borrowing.

If you’re concerned about maintaining your credit, consider monitoring at least one of your scores. Your bank or one of your credit card issuers may provide a free score, or you can sign up on one of the many sites that offer them. That will give you a better idea of how lenders view you as a credit risk and can help you see which behaviors help and hurt your scores.

Q&A: Wondering why your credit score is bad? Here’s how to make it better

Dear Liz: I am trying to get my credit score figured out and was wondering if you have any recommendations for a credit report guru in my area? I need someone to walk me through why my score isn’t higher and to help me resolve that issue.

Answer: Unfortunately, many credit repair companies are scams. Even those that are legitimate are essentially selling you something you can do on your own, for free.

Understand first that you don’t have just one credit score: You have many, and they change all the time based on the information in your credit reports. Consider signing up for a service that provides you a free score that you can monitor over time. That can help you understand what behaviors help and hurt your credit. These services also typically give you reasons why your score isn’t higher. (You may be able to get a free credit score from your bank or a credit card issuer. If not, many sites online provide free scores.)

Next, get all three of your credit reports for free from AnnualCreditReport.com. (Type the address into your browser rather than using a search engine, since there are many look-alike sites. If you’re asked for a credit card, you’re on the wrong site.)

Look for obvious problems, such as accounts you don’t recognize or late payments being reported when you paid on time. Dispute incorrect information, using the links provided. Negative information that is correct can typically stay on your credit reports for seven years, although the impact on your scores should diminish over time.

In general, you can improve your scores by paying bills on time, using 10% or less of your available credit limits and having a mix of credit types (credit cards and installment loans). If you’re starting from scratch or trying to improve bad scores, consider a credit-builder loan from a local credit union or an online lender.

Q&A: Credit report mistakes are common. Here’s how to fix them

Dear Liz: Two of my credit card issuers have drastically lowered my credit limits. They blamed my credit report at Equifax. At first, Equifax could not even find my report. I had to send paperwork to verify that I even exist. It turned out that my credit file had some inaccuracies. One of the credit card companies restored the credit limit on one of my cards but kept the lower limit on the other card. I have filed complaints with the Consumer Financial Protection Bureau and would appreciate any advice as I am confused and upset.

Answer: That’s understandable, and you’re not alone. Problems with credit bureaus topped the CFPB’s list of consumer complaints in 2022.

You did all the right things: getting a copy of your credit report, disputing the errors, following up with the credit card companies and filing a complaint with the CFPB when your credit limits weren’t restored. The CFPB will reach out to companies to help facilitate a resolution.

If that doesn’t work, consider contacting your local congressional representative. These lawmakers typically have constituent services staff that may be able to help.

You should check your credit reports at Experian and TransUnion in case the errors aren’t limited to a single bureau. If the inaccuracies stem from possible identity theft, consider freezing your credit reports at all three bureaus to make it harder for scam artists to open new accounts in your name.

Q&A: How to help someone else build credit

Dear Liz: My 30-year-old son lives in Southeast Asia. He has some U.S. bank accounts but no U.S. credit cards. If I add him to my credit card, will that help to establish credit? Or is there another way for him to start getting credit in the U.S.? At some point, he and his wife will move back to the U.S.

Answer: Adding someone to your credit card as an authorized user can be a great way to help them build credit. Your history with the card is typically added to the other person’s credit reports and used in calculating their credit scores. If you can add him to more than one card, even better. As long as you use the cards responsibly — paying the bills on time, using only a fraction of the available credit — his scores should benefit.

You don’t have to give your son access to the cards for this to work. If you do, keep in mind that authorized users aren’t responsible for paying any charges.

Authorized users typically can be added or removed with a phone call to the issuer. You also can add an authorized user online by logging into your credit card account. But removing them may require you to pick up the phone.

Your son can build credit in other ways, including credit builder loans and secured cards, but those may have to wait until he has a U.S. address.

Q&A: Why asking for lower card limits can hurt your credit scores

Dear Liz: My wife and I recently paid off our home mortgage and now have only our two Visa cards, which we pay off in full each month. Depending on our monthly expenses or purchases, those balances rarely exceed a few hundred to possibly as high as a thousand dollars. Each card has a limit of several thousand dollars and would be much higher had we not previously requested lower limits on the accounts.

My credit scores have plummeted from well over 800 to the low 700s. One site that reports credit scores suggested that I open more credit accounts, because lenders supposedly like to see a variety of accounts when assessing creditworthiness.

This makes no sense to me. I have had an excellent credit track record for decades.

I’m concerned that with our current scores we may not qualify for preferred (0%) financing when we make a couple of car purchases in the not-too-distant future. While we could pay for those purchases in cash, my preference would be to take advantage of such a financing option and keep my money in accounts that would continue to increase in value.

Are we stuck with this situation unless we are willing to go into further debt?

Answer: No, but you need to be a little smarter about how you handle your credit.

You didn’t help yourself by asking for lower credit limits. The formulas like to see a big gap between the amount of credit you have and the amount you’re using, even if you pay in full each month. Ideally you would keep your utilization percentage in the single digits.

The closure of your only installment loan likely took a toll on your scores as well. As you were informed, credit scoring formulas favor those who responsibly handle a mix of credit — loans as well as cards. You can have good scores using just credit cards, but you might not achieve the highest possible scores without an installment loan.

Does that mean you won’t get 0% financing when you’re ready to buy a car? Perhaps, but 0% financing is pretty hard to find these days anyway and may not be the deal you think. You typically have to give up manufacturer rebates to get special financing deals and dealerships are often more resistant to negotiating on price. In other words, what you save on interest may be more than offset by a higher price tag for the car. You may find yourself better off using a low-cost auto loan from a credit union or paying cash.

If you do want to finance the cars, start by asking your credit card companies to restore those higher limits. Consider opening another credit card account or two if the first vehicle purchase is six months or more in the future because your credit will need a few months to recover from the temporary ding of the applications.

Another option is to get a small personal loan, which would add an installment loan back to your credit mix. Only you can decide whether paying some interest now is worth the possibility of paying less interest on a future auto loan.