The Easiest Route to Better Ratings: Closing Accounts
There are those who say that closing credit lines hurts your score because it raises your credit utilization percentage. This is true in many cases, but closing certain types of accounts is still advisable in many situations. For example, instead of keeping many tiny lines of credit open at stores, you might want to ask your bank for a larger line attached to your checking account -- at a lower rate of interest. This way, your debt utilization number stays down but your financial piicture looks less cluttered. There are lots of ways to keep the debt utilization ratio down but only one way to close off all those potential leaks that exist in the form of small, high-interest, unused credit lines.
As if you needed another reason to check your credit scores, let's give one other: You might have accounts open that you do not even know about.
Why is this a problem? Your ratings are determined in part by how much credit you currently have extended to you. If you have a department store account or a credit card that you have completely forgotten about, that line of credit can work against you. The math and logic works like this:
Variables:
Annual income = i
Current actual annual payments = a
Current potential annual payments = p
Amount of credit that can safely be extended = s
The formula would be something like:
i - (a+p) = s
if i < s, you have a problem. If i = s, you have a problem. The larger i is in relation to s, the better your score. If i is more or less constant, to raise your score, you must lower either a or p. The easiest way to lower p is to close dormant accounts.
As s approches i, your score goes down. So if you make $100,000 a year and already have $90,000 in credit extended to you, your score will be lower than if you make $100,000 a year but only have $50,000 in credit extended to you.
So check your credit reports to find lines of credit that may be open but which you are not using. Close these accounts, and your score will rise.
