Verify. Check it out. Read all about it. “Just the facts m’aam.” That’s me. I hate spouting off about something of which I know nothing, and which I have not verified. Maybe that’s one of the qualities that’s helped me create and maintain a successful career as a Loan Originator since 1989.
Erica, the wonderful and sharply professional office manager at Weichert Property Works in Brooklyn considered cutting up a credit card after she finished paying it off. I argued strongly against that course of action. Her credit score could actually drop if she follows that path.
It’s a little known fact that closing a credit account is almost as bad as having a collection account on your credit history. I’ve seen the results first hand in my role as Loan Originator. Let’s face it, when you’re buying a house, if you can afford to do it, you pay off your outstanding credit cards so you walk into your new home debt free! I know because I did it, too when I bought my first house. You want a clear mind and a worry-free attitude about extra bills on top of your mortgage payment. But the results on a credit score are contrary to that logic, unfortunately.
I have seen folks with fantastic credit have their credit scores drop dramatically because in the months before they met me for the mortgage prequalification they paid off and closed their credit card accounts. Perfect credit histories are affected with a lower score because 12 accounts were paid and closed and reduced to 2 or 3 accounts. I applaud that conservative thinking, but apparently the credit scoring engines don’t.
In plain English, what happens is that you have fewer active credit accounts, therefore you are using less credit therefore your credit score has less to work with in determining your overall use of your credit. That’s the flawed logic (IMHO) of the credit scoring system.
While this opinion is derived originally from my professional experience, I took the time to verify the facts with the source of all things credit score related: The Fair Isaac Corporation, or FICO, the folks who created the algorithm used in credit scoring. You can find that information right HERE.
Hope that helps! (ERICA!)