How Closing and Opening New Credit Can Affect Your Credit Score — A Q&A with Tommy Lee, Principal Scientist at FICO

How Closing and Opening New Credit Can Affect Your Credit Score — A Q&A with Tommy Lee, Principal Scientist at FICO

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Ashley Dull
By: Ashley Dull
Posted: July 13, 2018
Our finance experts and industry insiders blog the latest news, studies, current events, and other interesting tidbits from inside the credit card industry.

Few feelings feel as liberating as when you pay off a credit card balance that’s nagged you for a long time. But while some consumers are quick to cancel the paid-off card to eliminate the spending temptation that restarts the debt cycle, taking such drastic actions could impact your long-term credit health.

Five main categories go into determining a consumer’s FICO Score. The first, and most important, is payment history. This looks at whether you’ve paid your bills on time in the past and is considered a strong barometer of future on-time payments. The second most important category — amounts owed — relates to total balances owed and the percentage of the available credit limit a consumer is using.

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Thirdly, 15% of the FICO Score calculation looks at the length of a consumer’s credit history — including the average age of an account and how long the consumer has had credit. The fourth category is how often a consumer searches for new credit — and whether a person is opening new accounts rapidly and searching for credit in the form of hard inquiries.

The fifth and final category is credit mix, which makes up 10% of the FICO Score calculation and looks at a consumer’s different types of accounts — credit cards, auto loans, or mortgages.

Tommy Lee is a principal data scientist at FICO who works on the company’s various scoring models. Whenever FICO creates a new scoring version, Lee helps to create the score’s accompanying model to make sure it is highly predictive. He also works with clients to help them understand the FICO Score so they can use it accurately.

We recently sat down with Lee to get a better understanding of how a consumer’s credit-related actions can affect their credit score.

Can there be negative credit score effects from opening a new credit card account?

“In the short term, applying for and receiving a new credit card can lead to a modest FICO Score decrease because it impacts the search for new credit category. But, of course, that category only makes up about 10% of the FICO Score calculation.”

What about positive credit score effects?

“It can be beneficial to open a new credit card in the long run, but only if the person can make their payments on time and keep their balances low. The most important category is payment history and the second most important category is amounts owed. So, a person can improve their FICO Score by opening a new card account in the long run by making their payments on time, keeping their balances low, and extending their available credit amounts over time.”

How can closing a credit card account hurt one’s credit, and can the damage be avoided?

“Closing credit card accounts can reduce a person’s credit utilization — which is a percentage of all of their available credit card limits that are being used at a given time. So, if a person has a balance on his or her remaining cards, it’s likely that the balance will represent a higher percentage of their available credit. If everything else stays the same, then closing an account can increase their credit utilization and could result in a lower FICO Score.

That damage could be avoided if you do not close the account and just put the card away and do not use it.”

In what other ways do credit cards affect a FICO credit score, and what is the number one thing cardholders can do to maintain good credit?

“People can maintain their FICO credit score by consistently paying their bills on time, by keeping their credit card balances low, and applying for new credit only as needed.

FICO also has an open access program which allows people to see the FICO Score that is actually being used by lenders on their credit card statement. Many lenders provide a FICO Score for free to consumers. This gives people an opportunity to check their credit health and understand how lenders view them against the rest of the population. It’s a very powerful tool for people to use to look at their FICO Score. More than 250 million credit accounts have this free access to their FICO credit score.”