Closing Credit Card Out without Negative Impact on Credit

[Anonymous]

Good Afternoon--

Curious to hear advice on my credit situation, as the research I've done on the credit reporting process seems to be as clear as mud.

I'm in my late-twenties and graduated college during the heart of the financial crisis (07-08). In an effort to establish credit, I went to my bank, Wells Fargo (then Wachovia) and inquired about opening up a low limit credit card. Despite being debt free and employed, the banker literally chuckled in my face and said there wasn't anything she could do (granted, she wasn't being malicious, that was just the market at the time). Next, I tried to get a Target credit card and was denied as well. Finally, I shopped around and was able to open up a $750/month Capital One credit card.

Over the next couple years, I made small monthly purchases (usually gas) and paid my bill off in full, and on time, every time. Soon, I was able to open up a Wells Fargo credit card with a $6500 limit, and a Target card (for occasional shopping). I never utilize much of my combined or individual credit (rarely go over 10% month) and like to have the credit option for emergency situations and to build credit for future house/car purchases, etc.

Currently I have the following three cards:

Wells Fargo ($6,500 limit; open 2.5 years)
Capital One ($750 limit; open 4 years)
Target ($2,000 limit; open 1.5 years)

Between the three cards, I don't have any missed or late payments. CreditKarma.com has my credit score listed at 755. However, I have a few questions about opening/closing cards and how that impacts the credit reporting process.

1) I haven't used the Capital One low limit card in about 8 months, so my initial instinct was to close it and look for a replacement card with more attractive rewards options. However, some of the research I looked at said that the length of credit history plays a major role in calculating a credit score. Since the Capital One account is my oldest, is it inadvisable to close this account?

1A) Conversely, since I'm not using this Capital One account any more, is it hurting my credit score by staying open and unused? Aside from account maturity, it doesn't serve me much utility based on its low limit.

1B) My CreditKarma score has gone down from 765 in May and June 2013 to 755 in July and August 2013, and I'm unable to figure out why. I was thinking the inactivity on the Capital One card may be it? All of my payments have continued to be on time, and I haven't over utilized the card.

2) Are rewards cards worth it? I'd be most interested in cards with legitimate travel and/or hotel rewards. Any suggestions?

Any thoughts are appreciated!

[Anonymous]

755 is an excellent credit score, especially for someone with a short credit history. So kudos!

There are a number of factors in determining credit score, and number of cards, and percentage of used credit can play into it. Sometimes closing a card can hurt your credit because it means you have less relative available credit. But since it sounds like you pay off your credit each month and this is a low limit compared to the other 2 cards, this is less of a concern.

If you close the account, it should still appear on your credit history for 10 years (if it was always paid on time) and count towards the length of your credit history. After 10 years, your credit history would get 1.5 years shorter (to the age of your next oldest account). So you'd go from having a 14 year history to a 12.5 year history, which isn't a huge drop.

Opening new credit can also cause a drop in your score, although opening one additional card is unlikely to cause a significant longterm dip. Also, obtaining a lot of new credit right before applying for a loan can make lenders nervous (they'll look at more than just your FICO score).

These are some very clearly written explanations:
http://www.creditcards.com/credit-card-news/fico-credit-score-account-length-credit-history-1270.php
http://www.creditcards.com/credit-card-news/fico-score-new-credit-loan-inquiry-1270.php
http://www.creditcards.com/credit-card-news/fico-credit-score-account-amounts-owed-1270.php

As for the change from 765 to 755--there are often small fluctuations in credit score depending on the balance you're carrying. Even if you're paying it off each month, there is time before the due data that there's a balance. So maybe you spent more on card in the last 2 months. Mine vary more than that (and variations between the 3 credit reporting bureaus have been as much as 80 points when I've bought my real scores). An inactive card should not impact your credit score.

I like rewards cards that give cash rewards, because then I can use it on whatever I like and am not limited to hotels or flights. Other people have other preferences.

You may want to consider seeing if Wells Fargo has a rewards program that you can convert your account to. This way you wouldn't have to close or open any accounts.

[Anonymous]

Thanks for the input!

My Wells Fargo card does have a rewards program, but I think the 10,000 points (i.e. $10,000 spent) over the last year have earned me a $50 account credit, or access to a bunch of random stuff like iPod cases. Not sure if that is just the going rate, or if it is a weak rewards program.

Since flights and hotels are my biggest expenditures (for weddings and vacations), I'd be happy to earn miles or rewards in that category.

[Anonymous]

One of the posters gave you good information.

Personally, I would get rid of the Target card because it's been open the least amount of time and as I understand, it's specialized for just Target purchases. You already have the Wells Fargo's card that has a high limit.

How I see it is: You need 2 cards and that's it. One is a backup in case the other one doesn't work.

I have a Chase card. They have different reward programs and one feature is a check/cash. I like it and would recommend it if you plan on getting another card.

[Anonymous]

Hi Anonymous,
Good questions! Finding good financial advice can be hard, especially if you have many people with different viewpoints providing different advice. The last person to comment is absolutely right about getting rid of your Target card, especially if you have the Target card with American Express, which was just rated worst prepaid card by Consumer Reports. And, store credit cards are HORRIBLE and will charge deferred interest once you pass the introductory time period. To answer your other questions...
1. I would leave this open, especially if your account is in good standing. Length of history makes up 15% of your FICO score. If you are interested in a card with reward options available, I would call a rep with Capital One and discuss switching over to a different card, such as the Capital One Quicksilver Cash Rewards Credit Card. It offers 1.5% cash back on all purchases since they don't have rotating categories, and pay no interest until August 2014, with a sign up bonus included. Here is a good post explaining how FICO breaks down your score, http://comparewallet.com/what-determines-your-credit-score/

1A. If you choose not to try to get a better rewards card with Capital One, I would request a credit line increase, since you stated your concern with this card is that the limit is low, which doesn't help you much. If you are good with your account, which it appears you are, you may request a credit line increase on all accounts every 6-12 months. Leaving a card inactive will likely default any rewards you may have racked up and and leaving it inactive for 1-2 years, may cause them to automatically close your account. Make little purchases on it here and there, like gas or groceries. Closing your account will also alter your credit utilization ratio a bit, so I would keep it open.

1B. The drop in your score could be due to a number of things, such as credit inquiries, your balances, new credit lines opened, etc. You can find out for certain by checking your credit report (free from each credit bureau every year).

2. Rewards cards are worth it, IF you use your card frequently enough to actually benefit from the rewards. One great travel rewards card that may interest you from Capital One is their VentureOne Rewards Card. As previously mentioned, speak with a rep to see if you can switch to a new card.

Hope this helps!

[Anonymous]

OP do yourself a huge favor and follow the very on point assessment by the first poster. It is a travesty how much misinformation is given as gospel when it comes to credit. That is all.

[Anonymous]

OP here, thanks everyone!