Answering your credit questions - #1 - why did my score drop when I closed out two accounts?

As per my post last week, let's tackle some great questions I've had recently from CBC Radioactive listeners.

Credit Question #1:

I had an excellent credit score of over 800 and have always paid my bills on time, etc. I closed out two credit card accounts as I didn't need them any more and hadn't used them in some time. Then, to my shock, I found out that my credit score dropped down to about 740. Why did this happen?

Answer:

The credit reporting agencies are vague with answers to questions like this. There's no specific criteria, that I know of anyway, that tells the public how much your score will go up or down based on closing accounts, opening accounts, etc.

However, yes, unfortunately, one's score will temporarily drop when closing an account. Why? I don't have the answer. This is the craziness of the credit reporting agencies and the credit card companies. This gentleman found out after the fact when calling back the credit card company that his score would indeed drop by closing the account. His question was, "why didn't they tell me this before I closed the account?"

When your score is being determined, all of your accounts are factored in. Having two credit card accounts with a zero balance is actually a good thing. Do not close these accounts. If you find that you're not using them, put the credit card in a safety deposit box, use it once a quarter and pay off the entire balance immediately, just to keep it in good standing and to continue to have positive reporting on your account. Ensure as well to check if the card has an annual fee. If you're not using the account regularly and do have a high annual fee (such as a points/reward card), switch it to a no fee or low fee option.

My suggestion for this gentleman, now that his accounts have been closed anyway and his score has dropped is to consider taking out a new credit card. Initially, his score will likely drop slightly by doing this, but within a few months of keeping a zero balance (but using it regularly and paying it off), his score will bounce back in no time.

I don't make the rules and don't even like most of them when it comes to the credit reporting agencies and financial practices of the credit card companies. Mostly, I don't like the limited amount of information and education on said practices for the general public. Hence, the entire point of this blog and my quest to educate the public on such issues. Be sure to drop me a line with your credit questions.