Paying off and cancelling my accounts... (good or bad)?

[Anonymous]

So I recently decided to just dump the credit cards. I have paid the total amounts on all my credit cards or revolving credit and actually cancelled the accounts out, (minus one credit card with a $500 limit). I was wondering if this was the right thing to do or not?

We have decided to only use our check card to make purchases, but we were wondering if we should the credit card fro things like groceries or gas, just to keep up our "spending and paying off"? or should we drop that all together as well?

I have a car loan that and a school loan, so we will still be on the radar as far as having "credit" but is paying off and cancelling accounts okay to do?

[Anonymous]

Unless these cards had fees- this was a poor choice-

Especially doing them all at once.

Re-open your non-fee cards and use them every 3 months-

Once out of debt- stay out of debt.  With a $500 CL you can't put gas in the car or buy groceries witthout hurting your scores. 

[Anonymous]

Why do you say that using that card fro gas and food will hurt my score? I thought that using your card and paying it off each month was the correct thing to do?

[Anonymous]

By closing all your credit cards, you now have no active revolving accounts in your credit mix. That will hurt your FICO score.

If you have one $500 CL, and use that regularly for gas and groceries, you will likely have high utilization (credit used to available credit ratio). That is a huge bomb to your credit score. For example - let's say you put $400 on the card for gas & groceries (not much of a stretch these days) and don't pay it off before it's due and that balance posts to the credit bureau. It will show your card at 80% util, which is dangerously close to maxed out. For best impact on your credit score, allow your card to show 1 - 9% util. You'd need a card with a much higher credit limit to avoid this scenario.

Message Edited by desifink on 08-12-2008 07:36 AM

[Anonymous]

desifink did a great job of explaining this-

This is one of the most misunderstood things about credit scoring-

The same thing can happen to people with 10K credit lines even if they PIF. 

Scoring uses the statement balance that is reported to the CRA's and unaware you PIF.

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adventurefilms wrote:

Why do you say that using that card fro gas and food will hurt my score? I thought that using your card and paying it off each month was the correct thing to do?

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[Anonymous]

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adventurefilms wrote:

Why do you say that using that card fro gas and food will hurt my score? I thought that using your card and paying it off each month was the correct thing to do?

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I also wanted to add that there's a difference between what's best financially and what's best for your credit score. Paying your cards off each month is the right thing to do financially to avoid interest charges. But if your card is reported to the CRs with a high util balance in the meantime, then your score will suffer.

If you're not planning to apply for new credit in the near future, then focus on what's best for you financially. Score drops due to util will rebound quickly when those balances are paid down.

[Anonymous]

Yes our plan is to have mine paid off.... my wife has the highest numbe to can get, but my score is not as good. We left me a card for gas and such, but if not maxing it out is the right thing to do, perhaps I'll just use it for "snacks" and going to the movies, thus keeping the spending on it, but keeping the amount down.

I also have a truck payment and school loan.... I know those aren't 'revolving" credit but does one time/clock work payments help my credit score with those two?

I can apply for new credit next year when "everything" is paid off.

Chris

[Anonymous]

Yes, on time payments will help with your installment loans (age of credit, on time payment history), but you won't see the score gains with those types of credit that you will with responsible handling of revolving credit. I second Timothy's suggestion that you reopen one or two of those revolving accounts you closed, as long as it won't cost you another inquiry and there were no fees associated with those accounts. Use them for small things and PIF monthly. If you're afraid you'll use them if they're in your wallet, keep them iced in the freezer or give to your wife to hide. You could even cut them up but keep the account open. A great way to keep them from going dormant is to use them for monthly recurring charges - for example I use a few of my cards to pay for monthly subscription fees to various things. I know when those fees will hit, and have set up an automatic payment with my bank's online bill pay service to pay those charges right after they hit my cards.

[Anonymous]

I called about re-opening one, but she told me it did have monthly fee's and re-open was not an option... I'd have to re-apply, so I'll just wait until next summer and spend this time to just get zero'd out!

I only thing I can even think I'd need credit for is buying a house... the car is new and everything else can be bought from my checking account

chris

[Anonymous]

Given the fact you claim your score is not the best, I definitely think this was not the best decision. Paying off the credit cards is a great idea. Closing them, is not, because not only do you have to worry about high utilization on the card you currently have open, but, you have also lost your history, which will often cause the score to drop significantly. It's like not having any credit at all (besides the currently open loans), and starting over. I recommend you not use any more than about $100 monthly on your $500 credit card, and focus on making timely payments on your other loans. Although different folks have different philosophies on whether to have credit cards, not, I still think it is very smart to at least HAVE the credit cards just in case there is a rainy day (especially if you do not have much disposable cash). The beauty of having credit cards is that, they're there when you need them, they help build a strong score and history that can even get you discounts and save you plenty money with certain items, and alas, if you don't want to use it...well, you don't have to.