According to the Federal Reserve, credit card debt fell in 2020 by 11% as compared to debt in 2019. A reasonable analysis would suggest that the decrease were due to a combination of factors including stimulus checks and Covid-19 lockdowns. The result is that many people paid off their credit card debt. So now that you have paid off your credit card debt, should you keep walking around with a zero balance credit card or close the account ?
Utilization Math
I know once I mentioned math you began to think , I’m not good at math and this is going to be complicated- but it’s really not. First things first. Credit Bureaus use five factors used to determine or evaluate your credit score. The first is your payment history and that accounts for 35% of your score. But the next biggest factor is your credit usage or credit utilization ratio.
Your credit usage, particularly as represented by your credit utilization ratio, is the next most important factor in your credit scores. Credit utilization ratio is calculated by dividing the total revolving credit you are currently using by the total of all your revolving credit limits. Confused? Ok break it down.
Let’s say you own three Visa credit cards with a credit limit of $3,000.00 each. It means that you have $9, 000.00 credit available for usage. Now, say you went shopping at Burberry, Prada, Vera Wang, Ted Baker and Tiffanys, spending a total $2,250.00 split between two of your three credit cards. It means that you have now used 25% of your available credit and therefore your utilization ratio is 25% ( $2,250.00 divided by $9,000.00). If you decided to close your third credit card, it would mean that your available credit is no longer $9,000.00 but $6,000.00. But by closing that credit card, your usage or utilization ratio when from 25% to 37.5%. That’s more than 30%! Creditors look negatively upon a person whose credit usage exceeds 30%. Therefore, you can see by closing your credit card which has a zero balance, you have lowered your credit score.
Critically Evaluate Your Reason
Basic question. Why are you closing your credit card account? Is it because you can’t control your spending and want to have fewer credit cards so that you don’t run up your debt? Or is that the rewards are no longer great compared to the annual fee and you want to get rid of the card? Before you close that credit card you can ask the issuer if there’s another card which offers lower or no annual fees with almost the same rewards and credit limits. Making such a switch, will ensure that your credit history is not impacted and your credit utilization would remain the same. Don’t just close your account and throw away your credit history which accounts for 35% of your credit card score. Think about work-arounds, that can preserve your credit history.
WHAT’S UP!
I have decided to add a new section to Money Monday’s called “ what’s up!”
Let’s talk about how to remove inquiries from your credit report. There are two types of inquiries made on your credit report, hard and soft. Hard inquiries made by others on your credit report and where you were denied credit or were not authorized can be removed from your credit report and increase your score. Here’s what to do (1) write a letter to the credit bureau disputing unauthorized inquiries (2) identify the company name and date of inquiry in your letter (3) state in your letter the unauthorized inquiry is a violation of the Fair Credit Reporting Act Section 1681b(c). (4) if if you get no response from the credit bureau, send another letter and remind them as in the case of Wenger v. Trans Union Corp. No.95-6445, they will be held liable for willful non -compliance if the items are not removed from your credit report.
And that’s what’s up!
