Don’t Make This Credit Mistake!
March 18th, 2008
By The XBanker
I get more argument over this advice than any other I give. But I assure you, I am not making this up.
When you get your credit report, you’ll find old accounts listed on your report you don’t use anymore — and have no intention of using anymore.
You know what I am talking about. The Best Buy “instant credit” card account you opened to get a discount on that stereo system? The retail card you opened in college when you were broke and needed that 20% discount to get the clothes you had to have?
Here is my advice:
Don’t close them!
Do not tell the credit reporting agency to list the credit cards you don’t use any more as closed on your credit report. Just let them be.
Rarely are credit cards listed as closed on your credit report unless you ask the lender to close them. (They hope you’ll use them again.) Once you tell the issuer you want an account closed, however, it must report the account as “closed at your request” to the credit reporting agencies.
Closing all your old accounts may cause your credit score to drop. It’s true, and I have talked to a number of people who have seen that happen.
Why should cleaning up your credit hurt it?
While closed or open accounts are both counted in calculating your credit score, once an older account is closed it may drop off your report, and that may shorten the overall length of your credit history. When it comes to credit reports, older is better.
Secondly, if you do use your cards quite a bit, you’ll want to have some extra available credit. That’s because the credit score does look at how close you are to your available credit limits. If you’re maxed out (even on just one card), your credit will suffer. Ideally, you want your debt to add up to no more than 10 percent of your available credit if possible.
So your next question is, “Doesn’t having too much available credit hurt my score?” The short answer is “no.” Just ask my friend Scott Bilker at DebtSmart.com. Scott has more than eighty (!) open credit card accounts and a credit score in the 800s, which is excellent as far as a score is concerned. That doesn’t mean you want to open a bunch of cards — doing so can also hurt your credit.
Having said all that, if there is an ex or a cosigner who might run up a bill you would be responsible for, by all means close the account. And if you just can’t stand to have all those old accounts listed on your credit, close just a few at a time. Start with the more recent retail accounts and accounts with smaller credit limits. And leave some of the older ones open for good measure.
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You are absolutely correct. I had obtained several revolving cards over the years. used a bunch in my younger years, had some late payments etc. . . and my FICO score wasn’t so great. I eventually paid them off, but still obtained more cards strictly out of convenience: 15% off my purchase at Macys if I open an account, free gift at Costco for opening an Amex etc. I opened the accounts for the dicsounts, but never really used them. So, after a few years – my credit score went way up, bought a house, I’m paying everything on time – and the score keeps rising. I always had intentions of closing my old credit card accounts because I thought it was bad for my credit to have so many. Never did, mostly out of laziness. But what ended up happening was I started getting letters stating my credit lines are increased. At least once a year I get credits of $20 added to my Citi card. For no reason, just a promotion with the hopes that I will start using my card again. I use the $20, then put the card away. Bottom line, there is more to gain by keeping those accounts open then there is closing them. Just be sure you are aware of the accounts you do have.