credit cards

Does no credit card equal low credit score?

Leslie McFaddenQuestionDear Credit Card Adviser,
If we were to cancel the only credit card we have and use our debit card for those transactions, would that hurt our credit score?
-- Kyle

AnswerDear Kyle,
Let me start by saying that your credit score is based on your individual credit report. There is no such thing as a joint credit report -- even if you share credit card accounts with your spouse or partner.

Back to your question: Living off the credit grid can have an impact on your credit score. Whether the closure of your one credit card hurts your score or not depends on what else is in your credit report.

I'm going to assume that the balance on this credit card account has been paid in full. When you close a credit card account that doesn't have a balance, your credit score will no longer calculate the debt-to-credit limit ratio, or utilization, for that account. Thirty percent of your FICO score, the standard credit scoring model in the industry, comes from the amount of debt you owe. A high utilization percentage can hurt you in this area.

Yet, not having a utilization percentage at all costs you points as well.

"It's one step worse than having zero utilization percentage, which is a step worse than having a very low utilization percentage," says Barry Paperno, consumer operations manager at FICO, the developer of the FICO score. Having a low reported balance on a credit card account is better for your credit score than having no balance at all.

In short, you will likely lose some points for closing your only credit card account. The good news is you can still have a score "over 700" if you have other accounts in good standing on your credit report, according to Paperno.

"If you have an auto loan or mortgage or student loan and you've been paying it for years, and you continue to," Paperno says, "you can still have a good score without a card or with the only card being closed -- but it's far from optimal."

If you don't have any other accounts on your credit report, Paperno says you can still have a good score if the length of credit history for your closed credit card account is long and free of derogatory information. In this scenario, you could eventually cease to have a credit score if you don't open any other accounts or take out a loan. FICO's minimum scoring criteria says that you have to have at least one account on your credit report that has been updated within the past six months for you to have a score. In other words, six months after the issuer stops reporting the account to the credit bureaus, you could cease to have a FICO score if it's the only account on your credit report.

You can order a copy of your credit report for free at AnnualCreditReport.com, the website set up by the three major credit reporting agencies to comply with the Fair and Accurate Credit Transactions Act. Under this law, consumers can order a free copy of their credit report from each of the three major credit reporting agencies -- Equifax, Experian and TransUnion -- once every 12 months.

If you didn't have the card for very long before closing it out, your score won't be as high even if you don't have any late payments on record. "It's not going to be down in the 500s just because you haven't had it that long," he says, "but you may have trouble getting up into the 700s in that situation."

Bottom line, you could still have a good credit score if your other accounts are in good standing. If this card was your only account, then you could still have a decent score until the issuer stops reporting it to the credit bureaus. Six months after it stops being updated, you will cease to have a score if no other accounts are on your credit report.

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To ask a question of the Credit Card Adviser, go to the "Ask the Experts" page and select "Credit Cards." Read more columns by the Credit Card Adviser. Follow Leslie McFadden on Twitter.
 

Bankrate's content, including the guidance of its advice-and-expert columns and this Web site, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this Web site is governed by Bankrate's Terms of Use.

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