Credit Wise (featured column)
by Jennifer Wallis
If you’re concerned about your credit score, you may be wondering what you should do about those old credit card accounts that may still be open but that you haven’t used in a while. Should you close them or leave them open?
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First, let me state that we all have numerous types of credit scores but the one that most lenders use is the FICO score so that’s the one I will address here. According to myfico, Fico scores are broken down like this: 35% payment history, 30% amounts owed, 15% length of credit history, 10% new credit, and 10% types of credit.
Closing an old credit card account can negatively impact the “amounts owed” portion of your score if you have credit card balances. This portion of your score has to do with how much debt you owe. This calculation is based on your credit utilization ratio.
In English, that means how much of your credit you are using vs. how much you could be using (balance vs. credit limits).
Are you maxing out your cards? The closer you are to your credit limits, the more it will negatively impact your credit score. So, if you close an account, you take away that available credit, thus lowering your credit limits and raising your credit utilization ratio if you have any credit card balances.
It has been widely reported that closing a credit card account will also lower the “length of credit history” portion of your credit score but this is not accurate in the short-term. This credit history will continue to be reported for 10 years. After 10 years, it will be deleted and it is possible to experience a credit score drop at that time, according to myfico.
If you are concerned about keeping your score as high as possible because you plan to purchase a home or car in the coming months, it may be a good idea to leave the old account open. It can be an even better idea to charge a small amount on it and pay it off the same month just to keep it active. Many credit card companies are making the decision to close the accounts that customers haven’t used in a while. The best way to keep this from happening to you is to use it occasionally.
(Editor's Note: Required use to keep accounts active may be once per year, however, company guidelines will vary. Check with your credit card company to learn more about their individual account requirements.)
If you aren’t planning any purchases, aren’t so concerned about your credit score, and are more concerned about identity theft and the risk of an open account, it may be a better idea to close the account. Your score may initially take a dip but with some active credit use on other accounts, it shouldn’t take too long to recover.
The best way to avoid open, unwanted accounts is to never apply for them in the first place. While you certainly can’t take a time machine back to college and undo impulsive decisions for that free t-shirt (before the CARD Act changed it all in 2009), you can make wise decisions when opening credit card accounts in the future.
The decision to apply for a credit card should be one that you take seriously and shouldn’t be made on the spur of the moment to save 10% while standing at the checkout line. If you hadn’t walked into the store with the intention of applying for a credit card, the best answer is probably, “No.”
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Copyright © 2013 by Jennifer Wallis. All rights reserved.