For example, it’s often written that credit utilization ratios comprise 30 percent of the FICO credit score. This is false. Utilization ratios are only one component of a larger category comprising 30 percent of credit scores called “Amounts Owed.” You can see the other components here.
Next, there’s that magic 30 percent utilization ratio number — the line you should never cross. But FICO never said 30 percent was magic. That’s something put forth by third-party “experts.” As I explained above, it’s only logical that using less of your available credit is a good idea. But it’s not as if your credit score will plunge if your utilization ratio is 31 percent. Just try to keep it as low as possible.
Easiest way to lower your ratio? Ask for a higher credit limit. A couple of years ago, I doubled a credit line on an American Express card to $20,000 via a telephone keypad menu. It took less than 5 minutes and I never spoke to a human.
As for keeping old accounts open to maintain your credit history, what many “experts” apparently don’t know is FICO scores consider both open and closed accounts, and closed accounts can remain on a credit history for up to 10 years. So closing an old account won’t significantly impact your credit score in the short term.
Finally, and most importantly: Read the popular press, and it’s easy to believe our credit scores must be constantly tweaked and monitored to keep us alive. It’s a credit score, people, not an ICU patient. Unless you’re in the market for a loan, or soon will be, don’t even think of paying some credit card company an annual fee simply because you’re afraid of damage to your credit score. If FICO wants to temporarily lower my score because I won’t pay some bank an annual fee, they can be my guest. Not only will I not suffer, I won’t even notice.
If you’re in the market for a loan, fine: Use every trick in the book to get every point possible. But if you’re not, don’t let the plethora of online pundits convince you to sweat the small stuff. In the decades I’ve been using credit, I’ve never once given even a fleeting thought to my credit utilization ratio, nor have I ever hesitated to close costly lines of credit I no longer had use for. Result? You can see it in the picture at the top of this post. That’s my FICO score: 848 out of a possible 850. Why is it near perfect? Simple. I’ve paid my bills on time every time for a long period of time.
Want to close an account to avoid an annual fee? Here’s how to go about it.
Step 1: Pay it off
While you can close an account to new charges while it still has a balance, to completely close it you should pay it off. So if it’s time to say goodbye, it’s time to zero that balance.
Got any automatic payments hitting the card? Move them.
Once the balance is zero, don’t use the card. Wait a week or two, then check your account online and make sure no charges show up.
Step 2: Break the news — twice
Balance paid? It’s breakup time.
Call the customer service number on the back of your card or on your monthly statement. When you get a customer service rep, confirm that you have a zero balance. Then tell the rep you’re canceling your account.
While you’re on the phone, ask the rep for a name and address where you can send a letter to make it official. When you hang up, write a short letter to that name and address. It doesn’t have to be fancy. Just include your name, address and account number. Say you’re canceling your account and want your credit history to reflect you requested the account be closed.
Use certified mail and request a return receipt so you can prove the company received your letter.
Step 3: Follow up
Let a full 30 days go by, then go to AnnualCreditReport.com and pull a copy of one of your credit reports. The account should show “closed by customer,” not “closed by creditor.”
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I founded Money Talks News in 1991. I’ve earned a CPA (currently inactive), and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate. Got some time to kill? You can learn more about me here.
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