Does closing a credit card account, lowers your Credit Score?

The recent federal law has put a restriction on the interest rate charged on credit card holders. Thus, credit card companies are charging fess for some or the other thing to make up for their lost revenues.

Credit card holders are asked not interest to close their credit card account as it will affect their credit score. They are clueless as they do not know what to do with the credit cards they do not use. Card holders are credit bound to pay annual fees, which is around $99 and $60 fees unless the credit card’s usage is $2,400.

The fact is that the credit score is not all affected by closing a credit card account. It just one of the many strategies of credit card companies to higher revenues. FICO/ Credit score is a value which is beneficial for finance companies like banks, insurance companies, landlords and employers to check if we can pay back the money they lend us or invest on us. A higher score will help a person to get a loan with attractive interest rates.

Don’t let your car shed your reputation

In 2010 more and more people will opt for all kinds of loan from home to estate to auto. While the economic crisis has just brushed away the sinking market, it’s time to invest wisely.  And as Obama keeps some of us sailing through our past hefty home loans through his “Mortgage Modification Program,” it’s important that you don’t lose your FICO scores in other acquired loans such as Auto.

FICO scores represent the credit worthiness of a person and his or her position to pay back the debts. Credit scores are calculated to gauge the risk of default by considering and taking in account of various factors of a person’s financial history. However, the actual formulae to understand the credit score is highly guarded, FICO has revealed the mechanism and components with which they provide weight age for each category;  where the highest component  of FICO  i.e. 35% includes card or automobile loan.

Auto loans are quite risky for people who have low credit scores. A person with low credit score when applies for auto loan would qualify for a higher interest rate compared to a person with good scored card. “It’s not only about money but the ability to manage it, and more importantly to have a reputation via financial stability.

“If you are in the midst of a bad loan or hit by bad credit score, you can still act smart and go for loan modification. Where the lender not only gives you options and guidance but also examines a full research report on your status.

Debt Restructuring helps enhance your Credit Score

The amount of debt you owe determines your credibility in market. If you are regularly paying your installments, debt interest amounts and other bills then you will have a high credit score with an opportunity to avail any kind and any amount of loan from any bank at a lower interest rate. You must be aware of the innumerous benefits that are bestowed upon you only due to your credit/ FICO score.

“U.S culture is inclined towards availing different types of loan. Due to this credit score holds an important part in an American’s life. All must not be aware that you might get a loan with higher interest rate if you have a low credit score. If you research then you might find out many ways to increase your credit score. One way in my knowledge is going for an ‘Auto Loan Modification’.

“Let me explain how lowering your debt payments will have a positive impact on your credit score. We usually have to pay monthly amounts for our car loan, home loan, education loan, etc. Now you have certain priorities according to which you make your payments. Usually there is a possibility that people pay their house loan first, then education loan and then if some money left they pay their auto loan payments. This leads to delay in car loan payments which ultimately results in repossession. To avoid such a situation, we can go for an auto loan modification.

While there are no universal rules, our experience shows that the earlier you start the process the better your chances of negotiating a successful transaction.

Dreaming of owning a SUV? Check your ‘FICO Scores’ before applying an Auto Loan

Most of the auto lenders will look into one of your FICO® scores to determine the rate they will offer you.

What is FICO?
FICO, created by The Fair Isaac Corporation as the first credit scoring system for a bank credit card in 1970, is the representation of your credit worthiness, i.e., your risk to your auto lender. If your score is less, you will not be fit for a loan. So, more your score, less risky you are. That shows you will not run away, but you will pay!

When your FICO gets affected?
There are few factors (by which you can Guess) affecting your Credit Score. (Source: wikipedia)

• 35% — Payment History: Late payments on bills, such as a mortgage, credit card or automobile loan, can cause a consumer’s FICO score to drop. Paying bills as agreed over time will improve a consumer’s FICO score.

• 30% — Credit Utilization: The ratio of current revolving debt (such as credit card balances) to the total available revolving credit (credit limits). Consumers can improve their FICO scores by paying off debt and lowering their utilization ratio. The closing of existing revolving accounts will typically adversely affect this ratio and therefore have a negative impact on their FICO score.

• 15% — Length of Credit History: As consumer’s credit history ages, assuming they pay their bills; it can have a positive impact on their FICO score.

• 10% — Types of Credit Used: (installment, revolving, consumer finance) – Consumers can benefit by having a history of managing different types of credit.

• 10% — Amount of credit obtained recently: Multiple credit inquiries for a consumer seeking to open new credit, such as credit cards, retail store accounts, and personal loans, can hurt an individual’s score. Applying for lots of new credit in a short period of time is also viewed as risky and can cause a drop in an individual’s score.

“Sometimes we do mistakes not unknowingly but well knowing them! We are aware of these things but we “Realize” it when a (bit) tough situation, like unable to pay your loan, Repossession of the vehicle, late payment, loan for higher interest rate, comes. This may seriously affect your Credit Score. (Repossession of your vehicle will definitely reduce your chance of obtaining a loan for the next vehicle)