Number of Revolving Accounts |
By Kenneth Long on August 4, 2010
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The credit bureau risk score reason "number of revolving accounts" is probably the most misunderstood risk factor that may affect your credit decisions. There is probably more wrong advice associated with this risk factor than any other.
It is a widely held belief that having too many revolving accounts is detrimental to credit scores. This belief is accurate, and it is only this portion of the puzzle that is correctly quoted by most experts. Simply put, having too many revolving credit accounts can increase risk to lenders, since it provides the consumer more opportunities to quickly take on more debt than they can afford.
How Many Revolving Accounts Should you Have?
The optimum number of revolving accounts is not revealed by Fair Isaac. While having a couple of store cards is optional, you should expect to maintain 2-3 major revolving bank credit cards if you want to build a higher credit score. Having too few bank revolving accounts will negatively affect your credit scores.
Having only one major credit card is risky enough, since you are overexposed to any change in terms imposed by that one creditor. Instead, having 2 or 3 major credit cards allows you the luxury of transitioning out of one unneeded card account without completely resetting the duration of your revolving credit history.
Having too many major credit cards will also negatively influence your credit scores. Therefore, it is probably a mistake to apply for more major revolving accounts if you already have at least 4 major credit cards. Again, store cards do not carry the same penalty (or benefit) as major credit cards. You can safely hold 1 to 6 store cards without worrying much about the impact.
What if you Have Too Many Bankcards?
If you currently have several major credit card accounts open, you may want to reconsider making a change. Most people will tell you to close some, and that advice is not terrible as long as you have no high credit card balances. Otherwise, your credit utilization rate could skyrocket as you eliminate some of your available credit.
Fair Isaac spokesperson Craig Watts has also stated that closing major credit card accounts will generally not help your scores, and it could hurt you. An increased credit utilization rate is one way that your decision could backfire.
Additionally, you could accidentally shorten your overall average age of your accounts. FICO claims that most High Achievers have an average account age of between 6 and 12 years.
When Can you Safely Close Credit Card Accounts?
There is nothing wrong with closing unneeded credit card accounts. You just need to understand how your credit scores might be affected based on which accounts you choose to close. Consider these factors:
- Debt Balances. This is the most important factor to evaluate when considering account closures. Closing an account should not cause your overall credit utilization rate to increase beyond 10%. FICO claims that High Achievers have an average ratio of 7% for revolving accounts. If closing an account causes your ratio to increase substantially, you could take a hit on factors representing 30% of the scoring models dedicated to your amount of debt. Of course, closing an account that currently carries a balance is murder to a credit score!
- Age of Accounts. Selecting an account opened most recently for closure will probably have minimal impact on your scores. Alternatively, if you choose one of your oldest accounts for closure, you could see a drop in your credit scores.
Other factors that have no impact on your credit scores may also be considered when deciding which accounts to close:
- Rewards. While this has zero impact on credit scoring, you will want to consider whether the account is more useful to you. A gas card that saves you money at the pump might be preferred to one that issues points.
- Retailer Acceptance. If you cannot use a card at many of the places you shop, it might be less attractive to keep. All the rewards in the world matter little if your favorite retailers do not accept that card.
- Annual Fees. An annual fee of $50-$150 may be tough to swallow. If you don't need the card for credit scoring purposes and cannot justify the fee, this could be a good account to close. Of course, it might be worth it to contact the creditor and give them the option to either waive the fee or close the account.
If you are told that you have too high a number of revolving credit accounts, you can safely close one or more of them if you follow the aforementioned guidelines. Sometimes a mortgage lender may request this as a condition of granting the loan in order to reduce the risk that you might become overextended. Even so, it is best to wait and let the lender request this first. If you start closing accounts too soon, it could lower your scores and cause denial of your application or a shift to a higher interest rate.
Join the Discussion at the Credit Forum: What is the ideal number of revolving accounts?
Number of revolving accounts is credit bureau risk score reason 26 with Experian and Equifax consumer credit scoring products. It is NextGen score code N7. For more information on credit scoring, see the complete list of credit score factors.
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