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Dear Gary,
I want to reduce the available credit on some credit cards and also cancel other credit cards. What do I say when writing to the creditor that will cancel the credit card and leave favorable information on my credit report? How do I reduce my available credit line and look good to the credit reporting companies?
Jonnie
Jonnie's on the right track. Keeping your available credit to a reasonable level is a good idea. The days when a wallet full of credit cards indicated good credit are over. Today lenders use a formula that includes how much credit you have available for use.
If you apply for a home mortgage or auto loan the lender is going to add up all the available credit that you have and compare that to your income level. They don't want you to buy a car today and then charge a bunch of stuff later. That makes it more likely that you'd have trouble making the car payments.
What the potential lender thinks of your credit affects how much you'll pay in interest. The better your credit report, the lower the rate they'll offer.
One way to look better to lenders is to close unused credit card accounts. That's what Jonnie is doing. But it's important to do the job properly.
An account is not closed just because the card is collecting dust in the bottom of your purse and hasn't been used in years. You must notify the card issuer and specifically tell them that you want to close the account. In many cases you can do that by calling the customer service number on your card or monthly statement. You can also mail your request to them. Use the address provided on your statement.
One interesting thing to note is that you can close an account while it still has a balance. You'd stop using that card but would continue to pay on any balance remaining until the entire amount is paid.
You don't need to give the card issuer a reason for closing the account. It's your right to choose not to do any more business with them. They may offer a lower rate if you stay. And, if that's attractive, you can leave the account open. But in Jonnie's case a lower rate wouldn't help her reach the goal of reducing her available credit.
Once the account is closed you need to make sure that the credit report notes that the account was "Closed by Customer". That means that you asked to have the account closed, not the credit card company. Generally when the card issuer closes an account it's because the customer isn't a good credit risk any more. You don't want to leave that impression.
Closing an account does not remove it from your credit report. It will remain for seven years. You do not have the right to have the closed account removed from your report.
There was a time when having closed accounts did make it harder to get credit. But customer closed accounts are much more frequent now. With everyone searching for lower rates, lenders expect to see a number of closed accounts. Many no longer even consider the number of closed accounts in the formula that they use to rate potential customers.
While we're on the subject, we should note that the card issuer can also close the account whenever they want to. Even if you've never been late with a payment. The reason is simple. The law isn't going to force them to do business that's not profitable for them. In some cases people who always pay their entire bill are being cancelled just because the bank isn't making money on them.
Jonnie also has the option of contacting the creditors and asking them to lower her available credit limit but leave the account open. If you've been good about making payments, many card issuers will automatically increase your limit anytime you approach it. You don't have to accept the increase. You can ask them to lower the limit and they will honor your request.
Once Jonnie has contacted her creditors she should wait a few weeks and then check to make sure that her instructions were followed. To do that she'll need to get a copy of her credit report. It's a good idea to get a copy at least once a year anyway.
You're entitled to one free report each year. Visit www.annualcreditreport.com to retrieve your free report under the FACT Act from each of the three largest credit rating companies.
Jonnie is being wise in managing her credit. It's an asset just like your checking account or retirement plan. A little effort now could reward her with lower interest payments on a home or auto loan.
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Gary Foreman is a former financial planner and purchasing manager who currently edits The Dollar Stretcher.com website and newsletters. You can also follow Gary on Twitter or on his blog.
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