“I need to cancel some of my unused credit cards to get a better loan.”

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April 9th, 2006

This myth is a long standing one among consumers of credit. The basic premise is that there is some magic number of accounts that you need to have in order to receive good credit. This simply isn’t true.

For example, I once worked with a real estate guru who had over 200 accounts on his credit report; mortgages he had used to build his business. He rarely ever had trouble finding another loan, because he had a proven track record of on-time payments and loan repayment.

The possible origin of this myth is that sometimes when a consumer goes to get an auto or home loan, the lender may look at their credit record and see some extra credit cards, or an unused line of credit. Sometimes, the lender will refuse to loan to a person until they remove that potential debt from their record.

In math terms, you can think of a person’s available credit as an empty glass. Let’s say you want to buy a car, and (based on your credit rating, income, etc.) your “glass” can only hold $300,000 worth of debt. You have a $200,000 mortgage, and $70,000 in various other credit accounts. If you want $40,000 for your new car, your glass would be too full. The lender may tell you to cancel some of the extra accounts that you don’t use.

Of course, this is a fictional example. In reality, if your credit threshold is $300k then no lender will want to be the last one to “fill
your glass” so to speak.

The bottom line is that closing an account will hurt you more than keeping it open. If you’ve already opened some extra accounts, just keep them open until you are specifically asked to close them by a lender.

There is no benefit to closing accounts to try to stay under some magic number.

Entry Filed under: Financial Myths
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