Wednesday, November 4, 2009

Opting out of APR increase doesn't have to impact your credit

By Jeremy M. Simon

Credit Score Report
Reporter Jeremy M. Simon
Jeremy M. Simon covers credit scoring and other issues as a staff reporter for

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Question for the expert

Dear Credit Score Report,
I wanted to know if it will damage my credit score if I opt out on a credit card that they just changed. I pay on time, but they are changing the APR to 29.99 percent. Will it affect my credit score? -- Marisol

Answer for the expert

Hey Marisol,
As with most credit scoring issues, the answer to your question isn't so clear-cut. While the higher annual percentage rate alone won't change your credit score, closing that credit card account could. For FICO credit scores, "It's all going to depend on what else is going on in their credit report," FICO spokesman Craig Watts says. "There is no one-size-fits-all answer."

For example, say you currently have $2,000 in overall credit card debt and a combined total of $10,000 available on all your credit card lines. But then you close a card with a zero balance and a $5,000 line of credit, cutting your total available credit in half. That leaves you with much more debt compared to your total available credit ($2,000 compared to $5,000, in this example) -- increasing what's known as your utilization ratio.

"When you close a credit card, you may increase that ratio, and that's not good for your score," Watts says.

From a lender's standpoint, a lower utilization ratio suggests you are less likely to max out your existing line of credit. You don't say whether you have other cards or what you owe on any cards you have, but if you have no outstanding debt on any of your open credit cards, it doesn't matter if you have a $10,000 line or credit or a $2,000 line of credit. Your utilization rate in either case is still 0 percent, and you're in great shape.

But there are other factors to consider. Some people may tell you that closing an older credit card account is bad for your credit score because it shortens the length of your credit history. Watts says that isn't true for FICO scores, however -- at least in the short term. "The FICO score formula, at least, looks at both open and closed accounts on a credit history," he says.

You still may want to think twice before , however, Marisol. After all, information from closed accounts doesn't remain on your credit report forever. All three major credit bureaus -- Equifax, Experian and TransUnion -- say that positive information from closed accounts, such as credit cards you always paid on time, only appear on your credit report for up to 10 years. Negative information, meanwhile, remains on your credit reports for seven years. So while closing that credit card account may not immediately lower your FICO score, losing the record of your on-time payments could hurt your credit score in the future.

Here's how:

  • Say your oldest card is 20 years old and your second-oldest is 8 years old, then you cancel the 20-year-old card.
  • That canceled card stays on your credit report for seven to 10 years, until it's anywhere from 27 to 30 years old and then drops off.
  • Once the canceled card drops off your credit report, your oldest card is just 15 to 18 years old. That means that you have a significantly shorter track record of success (15 to 18 years versus 27 to 30 years) than you once did.
  • Since length of credit history is a factor considered when calculating your FICO score, it means that your FICO score will likely suffer.

Whether you asked that the card account be closed -- or the bank decided to close your account -- doesn't matter to FICO. Although this distinction can appear on a credit report, "the FICO score doesn't care who closed the account. It's not factored into your score at all," Watts says.

Marisol, if you still plan to pay off the remaining balance on that 30 percent APR credit card and then close the account, you need to be extra careful with any other debt you still have. That means continuing to pay all your bills on time, not taking on additional debt and completely paying off any other credit card balances or loans, if at all possible. But rest assured that the consistent payments you've already demonstrated on your soon-to-be ex-credit card won't simply vanish immediately from your credit history -- and your FICO score -- when you close the account.

Suddenly facing a nearly 30 percent interest rate is a tough situation, Marisol, but it's not an unusual one these days. Luckily, cardholders still have choices. In your case, by considering your right to opt out of the higher interest rate, you're showing you care about making smart decisions when it comes to credit.

Congratulations and good luck.