Originally Posted by Marathon Man
When someone has, say 3 cards with say, $2500 max limits on them, and let's also say they are new to the game and so they cannot really get more than about $8,000 in credit anyway... Now, if they cancel one of these, they just freed up $2500 of their "available" debt that they can have for themselves...
This is not quite right. You do not create available debt by cancelling cards. Paradoxically, you can improve your score by having more cards. One part of the FICO equation is the ratio of debt to available credit. For example, you charge $5K/month on one card with a $10K limit. Your debt to available credit ratio is 50% (5K/10K), which is high.
If that same person charges $5K on a card with a $30K limit (or several cards with a $30K combined limit), the debt/limit ratio is 16.7%, which is much better. Creditors like the debt/limit to be as low as possible.
In addition, another factor used is average age of accounts. If you open and close accounts, your average age of accounts decreases. On the other hand if you open an account and don't close it (even if you never use it) the average age increases. You would do this with credit card accounts that don't have annual fees.
These are only generalizations. If you open and close one or two accounts, your FICO won't fall apart.
In reference to the comments about income, the first observation is correct: FICO does not consider income. The implication is that if you carry X amount of debt and are paying it off you have adequate income.