When we started an experiment to cancel all our credit cards 232 days ago several people warned that this could negatively impact our FICO credit scores. This seemed like a reasonable concern and now that some time has passed it’s time for a status check.

With the declining interest rates we decided to see if we could get a better interest rate for our existing credit line. Didn’t want to borrow any new money, just went fishing for a better rate. We were able to get almost two full percentage points lower and found out that my credit score has gone up 38 points since the last check before we canceled the plastic demons. Nice!

Before getting too excited, I don’t know if this positive change was because we canceled the credit cards or a normal fluctuation in credit score calculation. I do know, whatever the cause, the direction it’s going is the right one.

An October 2007 article in Kiplinger strongly refutes that there is any benefit to your credit score by closing credit card accounts:

There are two key reasons why closing old credit-card accounts can hurt your credit score: The move affects your credit utilization ratio and your credit history.

Credit utilization ratio is how much of the available credit you are actually using. The lower the better, but less than 10% doesn’t really help you, according to the article. So if you have a credit card with $10,000 credit line spending $1,000 (10%) would be better than spending $8,000 (80%).

Before checking the score I reopened my Bill Me Later account. Why? I’m seeing a number of 12 months no interest deals through Bill Me Later while looking for a computer to replace the one that was stolen and might want to take advantage of that deal. Also, I wanted to see by reopening the established account what impact that would have in the future. Several different sources have pointed out that the age of credit accounts is important. If this is true, while we’re saving 2% by canceling old credit line in favor of a new one with better interest rates, we could be hurting our credit scores.

If I do use Bill Me Later my plan is to keep the money in my money market account, earning interest for me instead of some third party, and before the 12 months is up payoff the total balance so I don’t incur any finance charges. Seems like a good plan, although the downside is we needed to have the account open with them. Bill Me Later isn’t a credit card, so not going to stop the canceled credit card counter on the home page, but this got me thinking about how spending the credit even if I never pay any finance charges might be impacting my credit score.

source: myfico.com

According the pie chart pictured above, simply paying your bills on time, every time, can have a huge impact on your credit score (35% of overall score). What have you done to improve your credit score?

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