When I’m reviewing our clients’ credit reports, I’m not only making sure that we have all significant debt accounted for but also to see if any information should be corrected. Frequently, I notice open credit cards with no transactions in the last year or so. When I recommend clients close these accounts, the reply is often, “But won’t that hurt my credit score?”
Before getting to the answer, let’s take a closer look at what comprises your FICO score. According to myFico, there are five components to your :
- Payment history (35%) – past behavior is used as a forecast for future behavior
- Credit utilization (30%) – the percentage of available credit that has been borrowed versus what is being currently used. Although there isn’t a specified number, the general goal is to keep credit utilization under 30%
- History (15%) –the length of time credit has been opened AND the length of time since the account’s most recent transaction
- Credit mix (10%) – having a good mix of revolving credit and installment loans generally represents less risk to lenders
- New credit (10%) – Opening multiple accounts within a short-time frame is flagged as potential financial trouble. Typically you can open 1 or 2 accounts within in a year without negatively impacting your score
Closing Old Accounts Correctly
The two FICO components that are impacted the most when you close accounts are History (10%) and Credit Utilization (30%). Even if you close your oldest account, its history will remain on record for the next 7 to 10 years. However, closing many accounts at the same time impacts your credit utilization because you are bringing down your overall available credit.
Here’s what you should do instead:
- Keep your oldest account open, unless there’s an annual fee, and close unused accounts in stages.
- Close an account or two now and wait six months. (You may see a slight dip in your score for a couple of months but it should rebound fairly quickly.)
- After six months, close another account.
- In the meantime, make a purchase or two on that old credit card throughout the year to avoid having the account closed because of inactivity.
Credit cards are convenient to use and we all love getting those airline points, but having too many cannot only expose you to identity theft but also simplify the number of accounts you have open. You’ll feel better about your finances when you know that each credit card has a purpose and deserves to have your name attached to it!
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