If you have a credit card you never use, you might be tempted to call the issuing company and cancel the card, simplifying your financial life. But consider this first: The more credit you have available to you that you aren’t using, the better your FICO credit score.
Suze Orman recently addressed this issue in The Costco Connection magazine. She notes that part of the FICO score, which measures your overall credit-worthiness for lenders, takes into account your “credit utilization ratio.” This is the total of the balances on all your credit cards divided by the total of the credit limits on all of those cards.
“So let’s say you have three credit cards, each with a $3,000 credit limit,” says Orman. “That gives you a total credit limit of $9,000. Now let’s say one card has a $1,000 balance, another card has a $2,000 balance and the third card isn’t in use. That’s a total of $3,000 in balances. That puts your credit utilization ratio at 33%.”
If you cancel the third card, she continues, your total credit limit drops to $6,000. If you spend the same $3,000 overall, your credit utilization rate then jumps to 50%
“There is no single magic number you want to aim for,” says Orman, “but lower is better, and I don’t recommend exceeding 30% (on any one card).”
You can still simplify your life. But rather than cancel the cards you don’t need, take out the scissors and cut them into pieces. The credit they offer will still be computed into your FICO score, even if you never use them again.
For more information on this or other lending questions, call or email Sean Mahoney or Cameron Burl (mahoney@megastarfinancial.com, cburl@megastarfinancial.com, 303-321-8800.
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