Does Having Too Many Credit Cards With a Zero Balance Affect My Credit Rating?

by Timothea Xi
Got too many cards? Calculate the consequences of closing them.

The old saw goes that you should never close credit cards if you can help it, because your credit rating could take a hit -- but to what extent is it helpful to have a bunch of zero balance credit cards collecting dust in your wallet, is an equally pertinent question. If you rarely use a relatively new card that imposes exorbitant fees, the dent to your credit rating may be minimal compared to the burden that would be lifted from closing the account.

Credit Card Utilization

Credit cognoscenti know that credit ratings are derived in part from how much of your available credit you use. In a Reuters article, Anthony Sprauve, a spokesman for FICO, points out that 30 percent of your score is based on revolving utilization, or the ratio of balances to credit limits. By closing a plethora of credit cards, you could potentially lower your aggregate available credit dramatically, thereby skewing the ratio to your detriment. However, this isn't necessarily the battle cry to leave every last card you own open. For starters, older cards carry more weight in your score, so keep those open; for newer cards, weigh credit impact of closure against card benefits.

Credit Rating Impact

To see just how much potential damage could result to your credit score if you were to close a few credit card accounts, calculate some what-if scenarios. Take the cards that you have and figure out the total utilization of their combined credit limits. Total all the balances that you have currently outstanding on the active cards. Now eliminate the cards you want to get rid of by subtracting those credit lines from the total utilization. Figure out the percentage that the balances now represent of the revised total credit lines. If the percentage is higher than 10 percent, avoid closing them.

Card Quantity and Credit Ratings

According to John Ulzheimer, president of Consumer Education at SmartCredit.com, it's not the number of credit cards you have that's pivotal to ratings so much as how well you manage them. His 14 credit cards are all paid on time with zero balances -- and his credit score is stellar. The maker of the FICO credit rating system, the Fair Isaac Corporation, recommends never closing credit cards you don't use, for the simple reason that doing so doesn't help your FICO score and eliminating them can lower it by increasing your balance-to-available-credit ratio. By the same token, don't apply for new cards you won't use, as the accumulation of credit inquiries could be damaging.

Upshot

The double-edged sword of an abundance of credit cards is that while they can increase your total available credit and potentially reduce your debt-to-credit utilization ratio, too many open cards with wide-open credit limits pose certain moral hazards of creating temptations to use more credit than you should -- which if acted on, could hurt your credit. Cards with zero balances due to inactivity, rather than prompt payment, are subject to being closed by card companies -- potentially hurting your credit -- so be vigilant about using them at least once in a while, to keep them alive.

References

About the Author

Timothea Xi has been writing business and finance articles since 2013. She has worked as an alternative investment adviser in Miami, specializing in managed futures. Xi has also worked as a stockbroker in New York City.

Photo Credits

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