If there are old merchant cards and other credit cards taking up
space in your wallet, you may be tempted to close those accounts,
since you don't use them anymore. However, that would be a bad move
for your credit score. Even
though you're not using them, those old credit cards are helping
your credit score in a number of ways.
To better illustrate how and why those unused credit cards help,
it's good to know how your credit score is calculated. Here's the
breakdown on how credit scores are calculated:
Payment history: 35 percent
Amount of money owed: 30 percent
Length of credit history: 15 percent
New credit requests: 10 percent
Types of credit used: 10 percent
Those are the factors that go into determining your credit scores and the weight that
each factor has in relation to the others. Now let's examine why
closing inactive credit card accounts lowers your credit score.
Those old, inactive credit cards you're thinking about closing
are actually helping your credit score because length of your
credit history is worth about one-sixth of your overall score. Not
only should you leave them open and keep them helping your credit
score, you might even want to use them occasionally so the issuer
doesn't close the account for you.
Amount of money owed vs. credit limit
There's a term for this that lenders and credit bureaus like to
use: debt-to-credit ratio. Your current credit balances, when
viewed as a percentage of total credit, are 30 percent of your
total credit score. Therefore, even though you're not using those
credit cards, the credit limit on each of them is actually helping
you lower your debt-to-credit ratio, which is a sign of responsible
credit behavior. Keep those accounts active and working for you by
using them occasionally.
Although it's only 10 percent of the total credit score, every
little bit helps. Those old credit cards are contributing to the
different types of credit accounts in your credit history. Most
people have several different credit cards or revolving credit
accounts, and hanging on to your old ones is one way to cater to
the credit-score formulas used by the credit bureaus.
Any one of the reasons listed above is a good reason to maintain
those old credit accounts. However, when taken together and backed
up with the facts, they're even more compelling. Even if you only
use cards every now and then, credit and charge cards from
merchants are important facets of your credit score and credit
history. If you keep cards active, they may even save you money via
better interest rates. Understanding the factors that affect your
credit score and checking your free credit score annually, can put
you one step closer to financial freedom.
Courtesy of ARAcontent
