Before you cancel that credit card, determine the impact on your credit score – December 31, 2009 (back to news stories)

Q. With interest rates skyrocketing and yearly fees looming on the horizon, my spouse and I have accumulated several credit cards that we’d like to cancel, however we’ll be in the market to purchase real estate in the next three to six months. How can we cancel credit cards and keep our good credit rating intact? – Future homeowner A. It’s smart of you to ask about these issues before you cancel any accounts, rather than be faced with an unexpectedly lower credit score when you’re shopping for a mortgage. "One factor in determining that credit rating is how long one has had credit lines open,’" said Robert Bacino of Insight Financial Services in Flemington. Bacino said closing down credit cards may seem like a good idea, but doing so can eliminate long-standing credit lines and, therefore, might affect your credit score adversely. When you cancel cards, you may want to hold onto your oldest ones. The biggest factor impacting your credit score when you cancel credit cards is your credit utilization percentage. This is a percentage that shows how much credit you have available to you compared to how much of that credit you’re using – your unpaid balances. "When you close an account, you close down some of the credit available to you,’’ said Barry Paperno, consumer operations manager at FICO, a credit scoring company. "The effect of cutting off available credit can increase that percentage of utilization.’’ Before you cancel cards, Paperno recommends you look at your current credit utilization. To figure that out, write a list of all your credit limits on open cards and on cards that you’ve closed but still maintain a balance and add up the total. Then write a list of your unpaid balances. Your total balances divided by your available credit equals your credit utilization percentage. The lower the percentage, the better. Here’s an example. Say you have $10,000 of available credit and you have balances totaling $2,000. Your utilization is 20 percent. Next, figure out how your utilization percentage could change if you closed certain cards. If you then close a card with a zero balance but available credit of $4,000, your utilization goes up to about 33 percent. "If by taking out of that calculation the credit card you want to close and if it doesn’t impact your utilization or only slightly, you can get a feel that it probably wouldn’t hurt your score, or not by much,’’ Paperno said.