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October 6, 2005
Close your Credit Card Accounts?
One of the reasons people get into credit card debt is that they have too much credit available, and are unable to manage it responsibly. If you're working to pay off credit cards, you can lower the risk of getting in over your head again by closing accounts once you have them paid off. After all, it's impossible to charge $20,000 if you only have one card with a $5,000 limit.
So are you paying off credit cards now? Why shouldn't you close the accounts? First, if you know you'll be unable to handle your credit limit without charging it back up again, then close them! Don't risk all the hard work you're putting in now to find yourself in the same situation again.
But if you've learned a lesson from all the stress and sacrifice of getting into and out of debt, it may be beneficial to actually keep your accounts open. Why? Turns out it's good for your credit.
A big chunk of your FICO credit score (about 30%) is determined by the ratio of how much you owe to how much you have available. The lower the ratio, the higher your score. The more you have available and unused, the lower your ratio. Apparently, it's a good sign if you can responsibly handle a high credit limit.
Another factor (about 15%) of your credit score is the average age of your accounts. The longer your accounts are open, the higher your score. So if you leave the credit cards alone, they'll build your score over time just by being there.
So if you're in a position where you can handle the credit limits, and where your credit score is important to you (if you own your house and don't ever plan on going into debt again for cars, college, or the like, it may not matter!), consider leaving your old accounts open.
(Source: myFICO)
Posted by Frank at October 6, 2005 8:03 AM
Comments
Posted by: rob
at October 6, 2005 9:44 AM
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it took me a while to learn the backwards math involved in your credit score. i had always thought that if you've paid off a card and don't plan to use it you should cancel it. it wasn't until i started looking towards purchasing a home that i learned this lesson. it's an important one. i've paid off all my credit cards, and now i just keep them in my file cabinet. now, if only i could get rid of all the junk mail they send me ;-)