I have noticed a lot of what I consider bad advice regarding closing credit cards to save an annual fee associated with some credit cards.
The FICO scoring model subtracts points every time you open or close a revolving credit account. The longer a revolving account is open; the FICO scoring model rewards you with more points.
A revolving account is considered an account with a pre-approved credit limit determined by the credit grantor that a consumer makes payments on the balance of the credit used during the month.
An installment account is typically a mortgage, student loan or auto loan that typically ( unless the payment is deferred) is paid on a fixed payment monthly until paid in full and closed.
It takes about six months to accumulate a payment history on any new accounts regardless if they are revolving or an installment loan. It is very important to keep credit lines open. If you don’t have current open credit lines, the results can be a lower FICO score. FICO Points are deducted if you do not have enough open credit accounts to be scored. If a balance also remains on the recent closed account you will also lose points.
You may see the following information reported in the explanation portion containing the credit score from each bureau: “Lack of recent revolving account information”
Or, if revolving accounts have been recently closed you may see the following message: “Recent account closures affected the score”.
Also taken into consideration are the number of inquires accumulated when a consumer applies for credit and how the inquiries affect a credit score. The explanation box may contain the following message: “Number of inquiries impacted score”.
There are two types of inquiries, a “hard” and a “soft” inquiry. Too many “hard” inquiries can negatively affect a credit score. When a consumer applies for credit, the potential credit grantor will pull what is considered a “hard” inquiry to review the consumer’s payment and balance history.
A “soft” inquiry is when a consumer reviews their own report, and this type of inquiry does not affect the score at all. A consumer could review their personal credit report every day with no negative effect on the credit score.
Another benefit to keeping a credit card open that may have an annual fee are the perks offered by the issurer. Many credit card servicers now offer free monthly credit monitoring for their customers. Due to the increased risk of identity theft for all consumers no matter how cautious with their information, it is wise to monitor your credit report for any suspicious activity such as new credit inquiries for new credit accounts that you did not apply for, or a sudden drop in your credit score.
I hope that you will find this information useful to make the educated decision of what makes the most sense for your particular situation, the annual fee or a healthy FICO score.
