Making up for lost revenue under a new federal law that restricts interest rate charges, many credit card issuers have been slapping new fees on cardholders.
Among the highest I've seen are a
So, what to do? Are we better off canceling a card to avoid unwanted fees or will doing so cost us more in the long run?
"We are advised not to close credit card accounts we no longer use because it will hurt our credit score," wrote a reader in an e-mail representative of dozens I've received. "I don't want to pay any fees. How does closing an account really affect my score?"
For the answer, I turned to
First, a refresher. Lenders use our credit score -- a number generally ranging from 300 to 850 -- to help them determine how likely we are to pay back a loan on time. The higher our score, the more likely we'll be approved for a credit card or loan at attractive rates.
In addition, insurance companies, wireless providers, landlords and employers are using credit scores -- presumably, a measure of how responsible we are -- to help them decide whether to do business with us and on what terms.
That's why having a good credit score is important. The good news is that if we use only a fraction of our credit limit, closing a credit card account won't have much of an impact.
The FICO score formula weighs a number of factors on our credit bureau report. The most important is whether we pay on time.
You can go to http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx for a complete list.
If we have one or more credit cards, the formula considers things such as how long we've had each account open, whether we pay on time and the "utilization rate," which is the account balance divided by the credit limit. For example, if we charge
The lower the utilization rate, the better. The formula also considers the utilization rate for all our cards combined. This is the part of the formula most likely to be affected if we close a credit card account.
For example, I have three credit cards, each with a
I typically charge
If you have high balances on one or more credit cards and you close one or more unused accounts, this can increase your overall credit utilization rate and damage your FICO score, Watts said. "To avoid that, you want to close credit accounts when your overall credit utilization rate is very low," he said.
For example, if I were to close one of my rarely used cards, my utilization rate would rise from 6.67 percent to 10 percent (
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(c) 2010 Humberto Cruz