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Canceling
Credit
by
Gary Foreman of The Dollar Stretcher
Dear
Gary,
I want to reduce the available credit on some credit cards and
also cancel other credit cards.
What do I say when writing to the creditor that will
cancel the credit card and leave favorable information on my
credit report? How
do I reduce my available credit line and look good to the credit
reporting companies?
Jonnie
Jonnie's
on the right track. Keeping your available credit to a
reasonable level is a good idea. The days when a wallet full of
credit cards indicated good credit are over. Today lenders use a
formula that includes how much credit you have available for
use.
If
you apply for a home mortgage or auto loan the lender is going
to add up all the available credit that you have and compare
that to your income level. They don't want you to buy a car
today and then charge a bunch of stuff later. That makes it more
likely that you'd have trouble making the car payments.
What
the potential lender thinks of your credit affects how much
you'll pay in interest. The better your credit report, the lower
the rate they'll offer.
One
way to look better to lenders is to close unused credit card
accounts. That's what Jonnie is doing. But it's important to do
the job properly.
An
account is not closed just because the card is collecting dust
in the bottom of your purse and hasn't been used in years. You
must notify the card issuer and specifically tell them that you
want to close the account. In many cases you can do that by
calling the customer service number on your card or monthly
statement. You can also mail your request to them. Use the
address provided on your statement.
One
interesting thing to note is that you can close an account while
it still has a balance. You'd stop using that card but would
continue to pay on any balance remaining until the entire amount
is paid.
You
don't need to give the card issuer a reason for closing the
account. It's your right to choose not to do any more business
with them. They may offer a lower rate if you stay. And, if
that's attractive, you can leave the account open. But in
Jonnie's case a lower rate wouldn't help her reach the goal of
reducing her available credit.
Once
the account is closed you need to make sure that the credit
report notes that the account was "Closed by
Customer". That means that you asked to have the account
closed, not the credit card company. Generally when the card
issuer closes an account it's because the customer isn't a good
credit risk any more. You don't want to leave that impression.
Closing
an account does not remove it from your credit report. It will
remain for seven years. You do not have the right to have the
closed account removed from your report.
There
was a time when having closed accounts did make it harder to get
credit. But customer closed accounts are much more frequent now.
With everyone searching for lower rates, lenders expect to see a
number of closed accounts. Many no longer even consider the
number of closed accounts in the formula that they use to rate
potential customers.
While
we're on the subject, we should note that the card issuer can
also close the account whenever they want to. Even if you've
never been late with a payment. The reason is simple. The law
isn't going to force them to do business that's not profitable
for them. In some cases people who always pay their entire bill
are being cancelled just because the bank isn't making money on
them.
Jonnie
also has the option of contacting the creditors and asking them
to lower her available credit limit but leave the account open.
If you've been good about making payments, many card issuers
will automatically increase your limit anytime you approach it.
You don't have to accept the increase. You can ask them to lower
the limit and they will honor your request.
Once
Jonnie has contacted her creditors she should wait a few weeks
and then check to make sure that her instructions were followed.
To do that she'll need to get a copy of her credit report. It's
a good idea to get a copy at least once a year anyway.
Unless
you've been denied credit (and hopefully that's not the case)
you will need to pay for it. The cost is generally $8.50. There
are three large credit rating companies. You can contact them
at: Equifax 800-685-1111; Experian National Consumer Assistance
Center(Formerly TRW)800-682-7654; or TransUnion 800-888-4213.
Jonnie
is being wise in managing her credit. It's an asset just like
your checking account or retirement plan. A little effort now
could reward her with lower interest payments on a home or auto
loan.
Gary
Foreman is a former Certified Financial Planner who currently
edits The
Dollar Stretcher website You'll find hundreds of free
articles to help stretch your day and your budget. Visit today!
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