Will Credit Score Suffer With new Card Cancellation?

Dear Opening Credits,

I recently paid off ALL my credit cards! And having an old virus-infected computer, I decided to purchase a new one. While doing so, the computer company of course gave me extras if I opened a new credit card with them. I wasn't thinking and accepted. After a couple weeks I paid that off as well, but wanted to close it. Is that wise and will it hurt my score?

- Jacqueline

Dear Jacqueline,

Up and down, down and up -- such is the nature of credit scores. Trying to keep track of their perpetual movements can leave you dizzy.

I understand why you're concerned about the numbers dipping, though. For most people, good FICO scores (the most commonly used score) are important to achieve and maintain. With them (and other financial factors such as a steady, well-paying job), you'll be able to qualify for low-interest loans and premium lines of credit. They can also make you attractive to insurance companies, translating into more affordable premiums. In other words, the higher the numbers, the less you'll be charged for products that can be quite expensive otherwise.

However, if you don't need to borrow any money from a bank or qualify for inexpensive insurance anytime soon, you needn't worry. But if you do, here's what you need to know about getting and keeping them in the excellent range.

First, don't focus too much on that computer company credit account, as closing it probably won't dramatically affect your scores. I can't say for sure what the drop in your score would be because FICO keeps much of its mathematical formula under wraps. FICO's general guidelines, which are public, should be enough to ease any anxiety, though.

FICO scores factor in all the borrowing and repaying activity that is listed on your consumer credit report. Some categories of information are very important, others are considerably less so:

35% payment history. Consistently sending money to your creditors on time shows you can stick to a contract.
30% outstanding debt. By keeping balances low compared to how much you can borrow, you're demonstrating good borrowing behavior.
15% length of credit history. The longer you've had to prove your credit prowess, the better.
10% types of credit used. Handling a variety of credit products well is preferable.
10% new credit. Aggressively applying for credit can be perceived negatively. Less is best.

Given this breakdown, you can see that opening a credit card account, using it well, and then closing it quickly would not be such a bad thing. Sure, it would impact the "type of credit used" and "length of credit history" categories, but combined they are only 25% of your score. You've been responsible with payments and depleting balances, both of which satisfy 65% of your FICO score, which is the majority of it.

To allay further worries, I suggest that you get your scores from MyFICO.com (for about $20) and see where you stand today. An excellent score is in the mid 700s and you could be there now. Your score will decline if you don't use credit at all, so you may want to keep the best of your accounts active by charging occasionally and paying on time and in full. After that, check them once a year or so. This way you can monitor progress without upsetting your equilibrium.