Tuesday, April 12, 2011

How a cancelled credit card effects your credit score

QUESTION: I've had an American Express charge card since 1999, which costs $95 a year to maintain. If I cancel it, what will this do to my credit score?
--Fred Cohen, Weston, Fla.

Ditching annual fees is often a smart play, although in this case $95 might not be much for what amounts to an open line of credit with no preset spending limit. Since you're closing a charge card (which doesn't let you run a balance) instead of a credit card (which does), your credit score probably won't take a hit, at least for now.

Credit-scoring firm FICO currently figures scores—the calculation most creditors use—without including charge cards in the all-important "credit-utilization ratio," which divides the total of all your credit limits by your total balances. (The lower the ratio, the better.)

Still, there's a longer-term risk to cutting up the card, says John Ulzheimer, president of consumer education at SmartCredit.com: Ten years after you cancel, the card's history will be wiped from your credit report, potentially shortening your credit history and lowering your score.

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