It’s OK to close expensive credit cards

By Felix Salmon
March 11, 2010
David Lazarus, of the LA Times, but I think he was a bit credulous on Monday when he complained about the downside of closing credit cards.


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I’m a big admirer of David Lazarus, of the LA Times, but I think he was a bit credulous on Monday when he complained about the downside of closing credit cards.

He’s right to slam Citigroup, of course, for slapping a $60 annual fee on a lot of credit cards which had previously been free. But many of those cardholders have the option of transferring their balances somewhere without such a big fee, and closing the newly-expensive Citi card. And that’s exactly what they should do. This part of Lazarus’s article is, I think, misleading:

So close down the account. Easy, right?

Not exactly…

Linda Sherry, a spokeswoman for the advocacy group Consumer Action, said canceling an older card that reflects long-term creditworthiness can indeed have an impact on your credit score.

“You might see your FICO score go down by as much as 100 points,” she said.

The FICO website is helpful on this front, and does say that closing credit cards might not improve your FICO score, since it’s likely to decrease your total available credit and therefore increase your credit utilization ratio.

But Craig Watts, director of public affairs at FICO, emailed me this statement:

It is extremely unlikely that closing a credit card could reduce anyone’s FICO score by 100 points. Closing a credit card may have no effect at all on a person’s score, or it may cause their score to lose points. Any change in score is caused by other information that is present on the person’s credit report, particularly the level of the person’s balances on other credit cards compared to those accounts’ credit limits.

In other words, if closing one card means that you’re much closer to maxing out your remaining cards, then your score might lose some points — but it’s very unlikely to go down by a quantum as huge as 100 points. Your credit utilization ratio is part of your FICO score, yes, but it’s not that big a part.

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The issue isn’t utilization, but average age of open credit lines. If your newly expensive Citi card is your oldest open card, against say two newish rewards cards, then closing it can make you look like a green credit to Fair Isaac’s models.

Full disclosure: this is a particular hobbyhorse of mine. My credit union sold its card portfolio to a US Bank subsidiary. Said subsidiary reports the transfer date as an open date to the CRAs. This was my only open credit card. The result for me was an immediate 100-point drop in FICO.

Posted by wcw | Report as abusive

Is FICO a measure of expected creditworthiness or of expected profitability (fee & interest income net of credit losses, ceteris paribus) of an individual borrower?

If the former, dropping one line of credit for a cheaper one ought not have any impact on your score. If the latter, expect a lower score. Said differently, if we find out that switching negatively impacts your score, that gives us insight into the true meaning of the score (which may differ from what the scorekeepers tell the public).

Posted by Sandrew | Report as abusive