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Mark Cappel
UpdatedMar 4, 2010
Key Takeaways:
  • Routine, on-time payments on a variety of accounts over several years will improve a credit score.
  • Closing an account with long history will harm a credit score.

I plan to buy a car soon on credit. Should I close several unused credit card accounts before or after buying the car?

I just checked my credit score and it is 804 so it is pretty good, but I have several credit cards that I have had for several years with zero balance on them. I would like to cancel them because I never use them. Will that hurt my credit score if I cancel them. I am planning on getting a new car soon so I do not want to hurt my credit score.

You may have heard the saying, "Let sleeping dogs lie." That holds true here for you, especially if the cards in question are your oldest tradelines. If they are not, then you can close them providing they do not have a large available balance. Regardless, closing an account lowers your credit score. Here, there is no point in your closing the accounts if you are planning to apply for credit soon. Get the car loan, then close the accounts if you must.

As you are inquiring about how to improve your credit score, let me give you some information on how a credit score is calculated. Your credit rating is calculated based on several variables, including:

Payment history

Payment history counts for approximately 35% of your score and is the most heavily weighted factor used in calculating your credit score. Consistently paying your bills on time has a positive influence on your score, while late or missed payments will hurt you in this area. If you have delinquent payments, the older the delinquency the less the negative impact on your score will be. Collection accounts and bankruptcy filings are also taken into consideration when analyzing your payment history.

Total debt and total available credit

This counts for about 30% and weighs how much debt you have compared to the total available credit on your accounts. If all of your accounts are maxed out, you will be considered a poor credit risk, because it appears that you are struggling to pay off the debt you have already incurred. If your account balances are relatively low compared to your available credit, this part of the risk analysis should help your overall credit score.

The score calculation also looks at these two factors independently. Having too much available credit, whether you have used it or not, could hurt your credit score, as statistical studies have shown that people with excessive amounts of available credit are a higher credit risk. Unfortunately, the bureaus do not define exactly what they consider excessive, so best tip is to use credit conservatively and to keep your debt to credit limit ratio low.

Length of positive credit history

This counts for about 15%. The longer you maintain accounts in good standing, the better your score will be. This shows that you are able to make a long-term commitment to a creditor and are consistently responsible about making your payments. If you have accounts with long history (5 or more years) and no missed payments, you should keep these open and paid off.

Mix of types of credit

This counts for approximately 10%. Having several different types of credit, such a credit cards, consumer loans, and secured debt, will have a positive influence on your credit score. Having too much of one type of credit can have a negative impact.

The number of new credit applications you have recently completed

This accounts for about 10% of your score. Applying for too much new credit in a short time period makes indicates that you could be credit risk, as you may be desperately trying to keep your head above water. The models make an exception for people who are shopping around for a loan, so if you are simply applying to see who can give you the best rate on a new loan, you need not worry too much about damaging your credit score.

How to improve a credit score

Here are four steps to improve your credit score:

  1. Pay off all debts and keep revolving lines below 25% utilization. Do not "max out" any loans or cards.
  2. Diversify you credit portfolio. If, for example, you have only a Visa, MasterCard, or Discover card, get a department store credit card or card from a gasoline retailer. Make your payments every month. Leave a small balance every once in a while to show that you are able to handle debt on more than one account.
  3. Keep your oldest credit account active. Remember "Length of positive credit history" discussed above.
  4. Pull your credit report and contest any inaccurate information so that it can be corrected by the credit bureaus. Go to the debt self-help center for sample dispute letters. The credit bureaus must follow the rules set forth by Congress in the Fair Credit Reporting Act (FCRA).

If you would like to learn more about credit reports, credit scoring, and what it means to you, I encourage you to explore the wealth of material offered by the credit information page.

I hope this information helps you Find. Learn & Save.