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OPENING & CLOSING CREDIT AND HOW IT IMPACTS THE
CREDIT SCORES
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One of the very confusing issues that people
constantly ask about is how closing credit affects them. The
question often posed, "If I close an account is it less of an
impact to the scores than if the credit grantor closes the
account?".
Recently I spoke at a school to a group of very concerned and
intelligent women. They were full of questions and unafraid to
share their personal concerns about their credit with the
group. After a long discussion about how credit works, and
expressing that CLOSING and OPENING credit hurts the credit score for
about a year, the question came up again and again.
It made me wonder if others were confused as well.
It does not matter whether you close the
account or the credit grantor closes the account on you. Either
situation your score will be affected negatively.
There are a few reasons why scores drop when accounts are closed or
new credit is opened.
1. The Fico score sees various red flags that warn it when the
possibility of defaulting on credit exists. Whether it makes
sense to us logically, or not, studies have shown that when consumers
close and open accounts the chances of default are greater.
Because of this the Fico score will automatically decrease when this
scenario plays out on your credit profile.
2. Having different types of open active credit helps the score
to see how you manage your credit as a whole. You become more
transparent to the scoring formula. If your credit consists of
an installment loan (car and student), 1 or 2 credit cards, and a
mortgage. If you have paid your last payment on either
the car or the mortgage and the account closes your scores can go
down dramatically. The reason is you are no longer managing as
many types of credit (your credit portfolio has reduced) and the
score has less accounts to use for evaluating your payment
patterns. This is why it is important to have more credit and
many different types. From my experience looking at 1,000's of
credit reports over the last 20 years, having 8-15 accounts (varying
types but more revolving), gives you the best chance of keeping
your scores high. If your score is an 850 and you close an
account your score will drop 60 points but you will still have a
great score at 790. If your score is a 720 and you close an
account your new score of a 670 will put you into a much lower
category of score. This reduction of score will make the cost
of money you borrow higher. The same goes for opening credit as
well.
3. The scoring Fico formula has found that when consumers open
credit chances of default are higher. The score also views the
new credit as "NEW" and prefers it to be seasoned.
"Seasoned" credit is credit that is over a year or 2 years
old. Once your credit is seasoned it begins to play positively
on the score. Seasoned credit is very good for the credit score
since it shows a history of you being a consumer who pays well.
The older the credit the better it is for the score. This
is another reason NOT to close accounts if you can help it.
Once you close an account it can be removed within 2 years of
inactivity by the credit grantor. If you close a 15 year old
Visa Card and it drops off your report (2 years later) it can reduce
your score up to 70 points depending on your credit portfolio.
It doesn't matter whether you have 7 -15 years of impeccable
credit or not. The scoring systems are not human beings
and they don't take into consideration your personal
explanations. They just follow the formula that was created to
spit out your risk level to whomever is evaluating your credit
profile. The Fico scores are most concerned with who you
are TODAY. It is very important that when you open or
close credit you make sure your timing is strategically planned so
you do not hurt your chances of getting the best financing
available. Remember, following the direction I have given
you in this article will not insure your scores are high if you are
late on payments or have high balances. Late payments and high
balances can reduce your scores 100's of points no matter how many
open active accounts you have.
"Great credit brings
great opportunity"
Copyright ©2009 North Shore
Advisory Inc.
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Tracy
A. Becker
President
155
White Plains Road
Suite
203
Tarrytown,
NY 10591
(914)
524-8300
(914)
524-5014
www.northshoreadvisory.com
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