Some credit card users mistakenly believe that the less credit they hold, the better their credit scores will be. This thinking moves some to cancel their credit cards in an attempt to better their FICO credit scores. Regrettably, closing an account can have the opposite effect and may actually reduce a FICO credit score.
Length of Credit History
If aiming to improve your credit score, understand the relationship between the length of your credit history and your credit score. According to Myfico.com, the length of your credit history influences your score by 15 percent. This number is small in comparison to other factors that influence your score, such as timeliness (35 percent) and the amount owed (30 percent). However, having a short credit history typically results in a lower FICO credit score. But as time moves forward and as your credit history grows, so will your personal rating.
Decreasing Credit History
Closing a credit account can have a negative affect on credit scores because this seemingly simple move can lessen the length of your credit history. For example, let's say you have two credit card accounts -- one account that's 10 years old and another account that's only five years old. Closing your oldest account can reduce the length of your credit history by five years. This drop in history can shave points off your FICO credit score. Closing accounts also decrease how much you have in available credit and may increase debt utilization (percentage of current balance in relation to your available credit limit). This factor also influences scoring.
Keeping Accounts Open
An effective way to protect your credit score involves keeping credit card accounts open, regardless of how often you use the credit card. Due to the potentially damaging effects of closing accounts, it's wiser to keep these accounts active, and then keep the credit cards in a safe deposit box or other protected area. This alleviates anyone taking the cards without your permission, and this can also lessen the temptation to charge purchases to these accounts.
Considerations
Despite the danger associated with cancelling or closing accounts, you may want fewer credit accounts to decrease the amount of credit in your name. If you feel compelled to close a few credit accounts, always start with the last account you opened. This is the youngest of all your credit accounts, and closing this account is less likely to decrease the length of your credit history. Satisfy the balance, and then contact the creditor to cancel the account.
0 comments:
Post a Comment