Is it a Good Idea to Close Credit Cards I don't Use?

by Rebecca Eve Selkowe, J.D

3 myths about your credit score:

I never really talked much about credit scores before, but that is starting to change now as I’m realizing how much unnecessary worry, concern, and confusion swirls around them.

So first things first. Your credit score is one credit bureau’s opinion of how likely you are to be able to repay the money you borrow.

Annnd… we’re done here!

[drops mic.]

Heh.

Of course, there’s a lot more to it than that – what factors go into it, what it means, how to have a good one – and based on what I hear from my very smart, very educated clients, a lot of mystery, too!  Here are the top three myths about your credit score, debunked.

Myth #1: If I never use my credit card, I’ll have good credit. WRONG. Your credit score is based on large part on how good you are with credit.  If you don’t actually use credit, no one will know if you’re good at it.  So if you don’t use a credit card, you won’t have bad credit, but your score definitely won’t be as high as it could (and, if you’re financially responsible enough to respect credit cards enough to fear them, as high as it should) probably be.

Myth #2: I should close any credit cards I don’t use. I hear this all the time. I scream “NOOOOOOOOOOOO!!!!!!” and start lifting things up and smashing them.  Okay I don’t really do this… but I want to.  Unlike in, ahem, other areas of our lives, when it comes to your credit score, size matters! Your score is based on part on how much credit you have available to you AND on the length of your credit history (how long you’ve been using a particular account). Closing cards reduces the amount of credit you have.  Closing your oldest card shortens your credit history.  New accounts, bad.  Old accounts, good.  HULK SMASH!

Myth #3: My credit score is the same as my credit report.  NOPE.  Your score is BASED on your report.  You can get your credit report for free each year, but it will not include your credit score.  You definitely want to make sure you’re on top of that report to make sure everything in it is accurate.  You can get your score for free, too, but you may have to do some finagling.  Your score is useful, but the report is even more useful.

There you go. Three myths about your credit score. Pop quiz next week! :)

If you have your head buried in the sand about YOUR credit score, it’s time to get it out. Good, bad, ugly, you have to know that number.  You may be surprised, you may be devastated, but you know that saying “start where you are?”  That’s you and your credit score.

So go check it.

Did these surprise you? Did you know these already? Are you all, tell me something I don’t know? What other questions did this raise for you?

What You Need to Know About Credit

You sit down in your mortgage broker's office because you can’t stand the news. Your credit is so bad you will not be able to secure a loan to buy the dream home you just bid on. Can you imagine? After months of taking time off work to run from one open house to the next, you forgot to check your credit report to make sure your credit was in order. What independent credit reporting agencies say about you and your credit can and will make the difference between your ability to buy a car, a house, or even a simple pair of shoes.

Your credit report contains everything about your credit history, including the good, the bad, and the ugly. Details you would never dream of sharing with even your closest of friends are listed neatly for all creditors to see. Your last residence, your employment history, your bill payment history, how many credit cards you have, how much you owe, and how much access to credit you already have are just a few of the juicy details contained within your report.

So what hurts your credit? Paying bills late, defaults on loans, too many credit cards, canceling your credit cards, large balances, medical bills that were lost in an insurance shuffle can all end up creating black marks on your credit report.

Many major life events, such as marriage and divorce, purchasing a home, or having a child are also financial changes that involve and can affect your credit.

Even worse, many credit files contain inaccuracies that can harm your credit rating. Just as reviewing your credit card statement can reveal charges you did not make, reviewing your credit report can reveal activity on accounts you don't use or new accounts you did not open, alerting you to the possibility of identity theft.

Few Savvy Ladies know that they can fight an improper charge on their credit card. The Fair Credit Billing Act, which was passed in 1974, makes sure the law is on your side. In fact, your credit card company is required to investigate and either correct the mistake or explain why the bill is correct within 90 days. They must acknowledge your complaint within 30 days.

Make sure to put your complaint in writing and send it via certified mail to "Billing Inquiries," which is listed on the back of your card statement. According to the law, your dispute letter must include your name, address, account number and a description of the problem. Visit Bankrate.com for a sample dispute letter to help you on your way. The deadline for notifying your credit card company of a billing error is 60 days from the date the bill was mailed to you. Keep in mind that the 60-day clock starts ticking on the day your issuer mails your billing statement, not the date you receive it. So by the time you receive your bill, you actually have 50-odd days to get a dispute letter back to your card issuer.

Request your free credit report online or by calling 1-877-322-8228. You can also contact any of the following “big three” credit reporting agencies: EquifaxExperian, or TransUnion.

Top Tips for Cleaning Up Your Credit

by Stacy Francis, CFP®, CDFA

According to myFICO, it's important to note that repairing bad credit is a bit like losing weight: It takes time, and there is no quick fix. In fact, out of all of the ways to improve a credit score, quick-fix efforts are the most likely to backfire, so beware of any advice that claims to improve your credit score fast.

Here are some of the top tips to raise your score.

  1. Pay off all outstanding debts.
  2. Write letters to creditors explaining any payments that were more than 60 days late. Request that the creditor share that information with the credit companies.
  3. Pay your bills on time.
  4. Cancel any credit cards or department store cards that you don't use. Be sure to put the cancellation in writing so the account will be show you cancelled it versus the credit card company.

Be careful about tainting your good credit with debt incurred by someone else with lower credit quality than you, such as a new spouse. Help your partner clean up his or her credit before you begin co-signing on additional credit.

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Stacy Francis, CFP®, CDFA

Stacy Francis is the Founder, CEO and President of Francis Financial, Inc., a Wealth Management and Financial Planning firm. With over 18 years of experience in the financial industry, she is a CERTIFIED FINANCIAL PLANNER™ (CFP®), a Certified Divorce Financial Analyst™ (CDFA™), and a Certified Estate Planning Specialist (CES™). She is the Co-Director of the Association of Divorce Financial Planners’ (ADFP) Greater New York Metro Chapter and a member of the Women Presidents’ Organization (WPO) and an honoree member of the Private Risk Management Association (PRMA). A nationally recognized financial expert, Stacy has appeared on ABC News, CNBC, CNN, PBS Nightly Business Report, The Today Show, Good Morning America, Fine Living Network, and The O’Reilly Factor. Stacy attended the New York University Center for Finance, Law and Taxation.