Part 1 – Risks to Closing Accounts to Improve Your FICO score
If you are looking to improve your FICO score a common mistake is to close accounts. People look at the fact you are judged on your credit mix and Fair Isaac likes to see a well round use of credit. Actually, your credit mix makes up 10% of your score. They think that closing the 10 credit cards you have will help you improve your credit mix. The true by doing this you could hurt your FICO score in a different way.
By closing accounts you are going to change your Utilization. This is the term used to gauge how much you owe. And how much you owe makes up to 30% of your FICO score. Utilization is figured by dividing how much you owe by your credit limits. So the example is if you have 3 credit cards. The first credit card has a balance of $5,000 and credit limit of $10,000. The second has a zero balance and a credit limit of $5,000. The third has a balance of $5,000 and a credit limit of $10,000. Your utilization is 40%. If you close the second card with a zero balance, your utilization is now 50%. This is worse and your FICO score could go down because this makes up a larger portion of your score than the credit mix.
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