Should You Close Old Credit Cards? A lot of people assume that if they are not using a credit card or department store card anymore that the best thing to do is close the account. That is far from the truth, as it can actually have a reverse affect on your credit score as one might think. Logical thinking would be to close an inactive card, but doing so will result in one less â€œopenâ€? account reporting to your credit. This will also affect your average age of accounts, which is incorporated in the credit scoring model. There are so many benefits of leaving accounts open, even if you do not plan to use them. Like mentioned earlier, having several older and established accounts reporting to your credit will increase your average age of accounts. Naturally, the longer the accounts are open, the older your average gets. This is very helpful when you do open a new credit account, as the older aged accounts will help offset the credit score ding you will initially take for opening the new account. You can also use open inactive cards to your benefit when it comes to your utilization, or debt to credit ratio. This is the total amount of available credit in relation to the total amount of debt you currently have. Lets go over a very simple example. Assume that you have 3 credit cards. Each has a $1,000 limit. One of the cards you do not use, and were thinking about canceling. Now, pretend that you have a $500 balance on each of the two cards that you do use. If you closed the card you do not use it would be a 50% utilization, as you are using $1,000 of $2,000. Now, if you keep the other card open your utilization drops down to 33% as you are now using $1,000 of $3,000. So just by keeping that other card open it has a positive affect on your credit score. Keeping an account open will also help your payment history. Each month that passes results in a paid on time mark for that account. For the best possible credit score you want to keep your accounts open, it is as simple as that. One reason that people consider closing cards that they do not use is to avoid paying an annual fee on a card that is not being used. There is a very simple solution for this. Simply call the credit card company and mention that you are thinking of closing the account because you do not want to pay the annual fee. Remind them that there are several options available to you that do not come with an annual fee. They will usually offer to drop the fee if you agree to keep the account open. They do not want to lose a customer. At the least try to get it reduced. Paying a small fee such as $20 annually is well worth keeping an old account open. It really has a positive and strong impact on your credit score. Think of it as a small investment in your credit, due to the amount of money you will save by being able to obtain lower interest rates. To ensure the account stays open it is recommended that you place a small purchase on the card every few months and then pay it off. A cup of coffee or a tank of gas every few months will keep it in an active state. If you just toss it in your drawer and do not use it for a period of 6 months there is a chance that the card issuer may close
it due to inactivity. You donâ€™t want to risk having these powerful credit score boosters closed, so just make a purchase here and there to keep it open. Little tricks like this will help you to achieve the highest possible credit score. In todayâ€™s rough economic times it is vital that you maximize your credit score, and do everything that you can to keep it in the upper level. By simply keeping your cards open, even if you do not use them, will result in a higher credit score.
Published on Oct 7, 2012