Potential score drop for paying off accounts too rapidly?

[PhillyGoodGuy]

Hello all,

I am considering taking a one-year personal loan against my 401K so that I can pay down all my debt quickly and lower my overall debt ratio.

My current credit lines are as follows:

Balance Owed/ Total Credit Available

Bank of America: 8000/ 23000

Chase: 4500/ 5000

Discover: 4000/ 5000

Chase 2nd card: 450/ 500

Department Store Card #1: 300/ 475

Department Store Card #2: 300/ 1700

My thought is that I would take a loan for approximately $18,000 and pay all accounts down to zero.

My concerns are as follows:

- If I leave no balance in any credit line, could I possibly damage my credit score in the short-term?

- I would like to leave at least one line of credit open. Is there an "ideal" amount of credit lines I should leave open in order to keep my score high? (It is currently 770)

- If I decide to close all of the accounts at once, will this damage my score? I would do this so I can reopen a new credit line with a significantly lower interest rate.

I would appreciate any thoughts or suggestions in this matter.

Regards,

PT

[MidnightVoice]

You don't have to close them if you pay them off!

[PhillyGoodGuy]

Thank you for the prompt response.

Could you please clarify? Should I not close the accounts for some reason?

If I have a credit card with a $25K limit, will it be difficult to re-establish this when opening a new account?

[Anonymous]

Unless you're paying crazy fees for an account, you should NEVER EVER close accounts even with zero balance. They count toward your history, which is part of FICO scoring. When you close an account then the longest account history you can have with that account is 10 years from the date you close it - it falls off after 10 years and you lose all that aging. However, if you keep it open indefinitely, it will never fall off your report and will continue to positively impact your average account age.

[Anonymous]

And about having all accounts with 0 balances - FICO likes to see responsible management of your accounts - so I'd let at least one account report under 9% util.

[PhillyGoodGuy]

Desifink - thanks for the clarification.

So, given what you stated...should I strive to get my accounts to resemble something similar to the following?

Bank of America: 0/ 23000 (15 year old account, 0% utilization)

Chase: 100/ 5000 (3 year old account, 2% utilization )

Discover: 0/ 5000 (Brand new account, will cancel this one)

Chase 2nd card: 25/ 500 (2 year old account. 5% utilization)

Department Store Card #1: 25/ 475 (4 year old account, 5% utilization)

Department Store Card #2: 80/ 1700 (6 year old account, 5% utilization)

[Anonymous]

For maximum scoring, let fewer than half your cards report a balance of 1 - 9% util. You have six accounts, so I'd let no more than 2 report balances.

[Anonymous]

I'd pay off all balances with this loan. Do not close any accounts that can remain open with a $0 balance. Your goal is to PIF not CLOSE. Bring this up with your loan officer when you get this loan, not to write CLOSE when they pay off the credit cards. Just PIF not CLOSE. SO PIF AND LEAVE OPEN AT $0 bal.

If you can have the lender write you a check in to your bank account and PIF the credit cards your self. More control and better.

Then once all your credit cards are PIF, you might be able to refinance in to a lower int rate loan that you just took out.

Leaving a small balance reporting on 1 or 2 credit cards seem to have a positive affect on score, but you can just use the CCs and PIF each month on the due date and generate the same affect. Paying 3 or 4 days before the due date usually is long enough for that account to report a balance and still PIF the account. If you PIF too early the CC company can report $0 bal. So you don't even need to technically carry a balance.

What ever you do try not to close credit cards. Long old open CCs with even at $0 bal is helpful to your scores. Closed accounts fall off credit reports lowering scores.

[bugg03]

Your score took the hit, when you opened the account, because of the inquiry, and damage to your average age of accounts. Closing the accounts dont change either of those factors, which is why everyone is telling you not to close.

Message Edited by bugg03 on 08-30-2008 09:32 AM

[Anonymous]

I would pay off and get rid of the store credit cards. They're not really affecting your score anyway. Close the Discover card, but definitely don't close the BofA card, since it has the longest record. Regarding card utilization, do you mean that you're going to carry a balance on some cards, or just charge a little every month and pay them off before they're due? You really don't need to use the cards much to show utilization. Just use each of them once a quarter and pay off that month, so that the banks that issue the cards don't charge an inactivity fee, or worse, cancel your account (which they've taken to doing to reduce their liability and improve their own credit rating). Regarding the wisdom of taking a loan from your 401k, how quickly can you pay the loan back? Every month that the $ is not in your 401k, you're losing the tax-deferred growth and compound interest. You should try to pay the loan back within 1-2 years. I also want to point out that FICO scores are not the only thing loan officers look at when determining whether to offer you a mortgage and at what rate. They also look at "available credit". If you have too many credit accounts open, whether you plan to utilize them or not, the bank perceives it as you being able to charge up a bunch of debt, jeopardizing your ability to pay back their loan. So, there's a fine line between having enough credit to show that other banks have enough faith in your loan-paying ability and having too much credit that you pose a higher risk to the new lender.