Before you cut up your credit cards in an attempt to curb spending, or purge old accounts, stop and consider the consequences. It seems rational to close off old credit card and retail accounts that you no longer use, but it may end up hurting your credit score.
When it comes to getting a mortgage, car financing, or any other credit, your current score will play a factor. Keeping your score high can save you thousands of dollars by qualifying you for better interest rates and lending products.
Credit Score Factors
There are the 5 main factors that influence your credit score:
- 35% Payment History
- 30% Amounts Owed
- 15% Length of Credit
- 10% New Credit
- 10% Type of Credit
Length of Credit
Under the length of credit category there are a couple of metrics which impact your score.
First, how long have you had access to credit? The longer you’ve had credit and paid on time, the better.
Second, what is the average age of your various credit accounts? Again, the longer, the better.
Why Keep Old Accounts Open?
In most cases, it is best to keep old accounts open. Provided you have a good payment history on these accounts, closing them will only hurt your score. By closing an old account you will usually reduce the average age of your trade lines. In some cases, you may even shorten the length of your credit file. Keeping accounts open will also increase your total available credit which reduces your overall utilization percentage at any given time.
On the contrary, if you have a poor payment history on an old account that you no longer use, closing it may be best since it will eventually drop off of your file.
Either way, always think carefully before closing any old trades. Doing the seemingly logical thing may actually hurt your score. If you have trouble controlling your spending, you can still cut up the cards, just don’t close the accounts.
photo credit: kainrSTOP! Don’t Cut Up Your Credit Cards if You Care About Your Credit by Andrew C. MacDonald