Multiple Accounts Could Be Good News--Or Bad--for Credit Score

Question: I have obtained quite a few credit cards over the years. Most of the accounts have zero balances and I don’t use them. There are two opinions about owning too many credit cards. One says your credit rating will be affected by having so many credit cards. The other says you have a better rating because you have a very high total credit line combined from all the accounts and you use only a small portion. Which is correct? Should I close all these unused accounts?

Answer: Your question is common enough, and the answer complicated enough, that the rest of this column will be devoted to answering it.

But if you’re in a hurry, here’s the short version: Both opinions may be correct, and you may or may not want to close those extra accounts.

Your ability to get credit is based on many factors, some of which are used to compute a three-digit figure known as your credit score. Your credit score incorporates information such as how long you’ve had credit, the total credit available to you, how much of that credit you use and whether you’ve had trouble making payments, among other factors, said Craig Watts, head of consumer affairs for Fair, Isaac & Co., the leading credit scoring company.

If your balances are small and your total credit limit is high, that indeed could help your score.

But that’s not the whole picture. Your credit score does not include information about your income. Many lenders, however, ask how much you earn when you apply for a loan so they can determine your ability to repay.

A lender who has access to your income and financial statements might well decide that all that plastic is a menace, because you could suddenly decide to max out all your credit limits and be unable to pay back your obligations.

Also, if you applied for a number of credit cards in a short period and you haven’t had credit for long, lenders probably will see you as a bigger risk than if you had fewer cards, Watts said.

Fair Isaac advises consumers to protect their credit score by applying for credit sparingly. (That’s good advice for protecting your financial health, as well.)

Once a credit line is open, however, closing it really won’t improve your credit score, Watts said.

In fact, if you carry a balance on any of your credit cards, closing accounts can hurt your score. That’s because the credit score formula looks at the difference between the amount of credit you’ve been granted and the amount you’re actually using, Watts said. Suddenly closing off a bunch of credit lines can make the balance you carry loom larger, and take points off your score.

You also can do damage by closing an account you’ve had for a long time. A lengthy history of credit helps your score, so you may want to hang on to that credit card you had in college, even if you never use it.

That doesn’t mean you should never close a credit card account, however. Having too many cards can be an invitation to disaster in other ways.

For one thing, it’s hard to keep track of more than two or three credit card accounts. Credit card companies are constantly changing their terms, and a moment’s inattention could lead you into paying more in interest charges or fees.

More accounts mean more of your financial information is floating around in the mail as well. Credit thieves love to steal statements and those pesky “convenience checks” from mailboxes and use them to run up charges in your name.

Having a lot of department store charge cards may not help your score much either. These cards tend to be easier to get, which is why they’re a good starter card for people who are building or rebuilding credit. But they don’t help your credit rating as much as harder-to-get credit cards issued by major lenders.

Finally, having a lot of credit cards could be catastrophic for someone who has trouble controlling his or her spending. Shutting those accounts could be the best solution in the long run, even if it does temporarily ding your credit score.

Here are some things to keep in mind when closing accounts:

* Your best strategy, both for your credit score and your financial health, is not to carry a balance on any of your credit cards. If you don’t carry a balance on any card, you can close as many accounts as you’d like without hurting your score.

* If you do carry a balance on any of your cards, make sure you don’t start closing accounts right before you want to apply for a major loan such as a mortgage or car financing. Wait until after you’re approved.

* Don’t cancel an account that still has a balance. Pay it off first, or transfer it to another card. Wait a month or two to make sure you get a statement that reports a zero balance to ensure that you’ve paid all the interest charges and fees.

* Don’t shut off longtime accounts. Opt to close department store cards and more recent unused lines of credit first.

* Call each credit card company to find out how they want you to close the account. If you’re a good customer, expect the companies to give you the hard sell in an effort to keep you. You might wind up with better terms or perks, such as extra frequent-flier miles, that could change your mind about closing a particular account.

* If you want to go ahead with the cancellation, ask the company to report to credit bureaus that the account was closed at your request. Check your credit report in a few months to make sure that was done.

* After you’ve closed an account, keep the paperwork the company sends you showing the account has been shut. You might need it if there are disputes over the account.

Liz Pulliam Weston is a personal finance writer for The Times.

Questions can be sent to her at moneytalk@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012.