Ask Stacy: Do I Have Too Many Credit Cards?

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Reader question: I've got 10 credit cards, most with zero balances. I'd like to close some - but won't that hurt my credit score?

Here’s a recent reader question – maybe you’ve wondered about it as well:

I’ve been focusing on getting rid of my debt using your book Life or Debt and your debt destroyer program. I’m working on purchasing a home here in the near future and would like to make my credit as appealing as possible.

Since starting your program, I’ve paid off a number of debts, including credit cards. Between my wife and I, we have 10 credit card accounts, and 6 of those 10 have zero balances – we have paid them off since starting your program, and one is a rewards card that’s paid off at the end of each month. We have 3 cards with active balances, and one closed account with an active balance we are paying off.

With that being said, what’s best for our credit score? A small balance on each of these accounts? Or do we have too many active accounts? Your advice would be appreciated! – Brad K

First of all, congratulations. It’s not easy – financially or psychologically – to dig yourself out of debt. Congratulations are also in order for deciding to buy a house. It’s a good time to buy, as I mentioned a few months back in the post Why You Should Buy Stocks and Houses Now.

As for your question regarding the proper number of credit card accounts: you definitely have more than you need.

But I don’t blame Brad for being concerned about closing unused accounts.  I’m one of many financial writers who has suggested that closing credit card accounts can have a negative impact on your credit score.  For example, here’s something I said recently in 3 Tips to Raise Your Credit Score – Fast

“Here are two things not to do. Don’t open a new account – that definitely will lower your credit score, at least short-term. And don’t close any accounts, since that would negatively impact your utilization ratio.”

What’s a utilization ratio? It’s how much you owe on credit cards vs. your available credit.  Example: You have a credit card with a  $10,000 limit, and you’re carrying a balance of $3,000 on it.  Your utilization ratio on this card is 30 percent because you’ve used 30 percent of your available credit. And that’s a good number: to maximize your credit score, you should try to keep your utilization ratio on each card below 30 percent.

While this is true, I think what I’m saying here is overstating the case for not closing accounts, and confusing people like Brad in the process.

If you’re about to apply for a loan soon;  especially a monster loan like a mortgage, you should use every trick in the book – including lowering your utilization ratio – to squeeze every point possible out of your credit score.  And that includes shifting balances from card to card to keep the utilization ratio below 30 percent on each.  But when I offer this advice, I don’t mean to imply that nobody should ever close unused credit card accounts out of fear of damaging their credit score.  I have a credit score of over 800 and I only have two credit cards: one that I use regularly and pay off monthly, and one that I keep as a back-up.

Closing four, or even five, of the 10 accounts you have is not just OK, Brad, it’s probably a good idea, especially if the accounts that remain reflect a low utilization ratio.  Because another way to scare a potential lender is to offer evidence that you could  go on a giant spending spree at any moment with a fist full of plastic.

While utilization ratios play a part in your credit score, they’re really not that big a part – definitely less than 30 percent of your overall score. They’re just talked about a lot by people like me because they’re something you can do that could slightly help your credit score quickly: in 60-90 days.  But remember that the vast majority of your credit score comes from something for which there’s no quick fix: paying your bills on time, all the time, for long periods of time.

So Brad, keep up the great work! Continue paying off the cards you have as quickly as you can, terminate some of those old accounts, and give yourself a pat on the back for taking control of your finances. I’m happy that Life or Debt is helping!

Stacy Johnson

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