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      01-11-2009, 10:21 PM   #24
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Quote:
Originally Posted by 40yroldawakening View Post
Can you explain why, I had 3 cards I didn't use anymore,I had used them before but paid them off and they had like 10k avail. on all 3. I was told it was hurting my credit score buy having them open, cause at any given moment I could charge 10k. I closed them all months ago.
Sure, and all this information I got straight from the CFO of a credit union who has been in the business for 25 years.

Here is how your credit score is computed:

Credit scores can be anywhere from a minimum of 380 to a maximum of 850.

35% of your score is from your credit history, I.E. do you pay the minimum amount on or before the due date. Approximately 290 points go to this alone. If you miss a payment your score goes down tremendously. BUT if you pay on time from then out you will recover 50% of the points lost in 6 months and 90% in 12 months.

30% of your score is made up of your capacity, or how much credit you have available. This is calculated by the amount owed on your cards divided by the amount available to you. Basically this is seeing how much you are leveraged in a sense. The closer the number is to 0 the more points you get, the closer to 1 the less.

15% of your score is made up of how long you have had credit for, I.E. how long you have had a credit card or a line of credit. Approximately 90 points go to this.

10% of your score is made up of what is called your "mix of credit". For instance how many revolving credits (credit lines, credit cards, etc.) you have compared to how many finite credits (mortgage, car loan, installment payments, etc.) you have. The ideal mix is no more than 5 revolving for every 1 finite.

The final 10% of your score is made up of accumulation, or how fast you get credit. The less the better. This area is affected when a bank looks up your credit for a loan, or a car dealership. The more inquiries you have the lower your score. That is why you should really do as much research as possible to make the car buying process as short as possible. You don't want multiple dealers pulling your credit history over 2 or 3 months. This area is worth around 85 points.


So your question about why it is bad to close credit cards is a very simple one to answer. Lets say you are carrying $1000 worth of debt but you have $15,000 available on your cards. The ratio is .06 . Lets say you close out those 3 cards with a combined limit of $10,000. Now you are carrying a debt of $1000 with a limit of $5000 available. The ratio is now .2 .

The system doesn't look at it the way you were told. It doesn't care how much credit is available to you at any given moment. It cares how close you are to exhausting your credit, because statistically people who are close to being or are maxed out are less likely to make payments. So even if you never used those cards, they helped keep the ratio down, not to mention they also helped out in the length of credit category.

Hope that helps and sorry about the
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