March 30, 2009
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News: To Cancel…or not to Cancel?
There's some confusion going ‘round about the benefits or liabilities of closing credit card accounts. It's no wonder, when we have so many mixed signals coming at us today. Unused credit card accounts are being closed by the millions because the represent a substantial exposure to the lending banks. Meanwhile, Fair Isaacs Corp. releases their new ‘FICO 08' standards which place great importance on old accounts, even if they are unused. So, what should a credit card holder do?
It turns out that there is a double benefit to keeping extra credit cards. One is the added combined credit limit that banks use to calculate their ‘U:O' (‘utilization ratio'). Banks don't mind a high balance charged up as long as the amount isn't over 30% of that person's available credit card limit. To some degree they factor this ratio on a per/card basis (no more then 30% on any given card) but they also consider the total amount of all cards a person possesses.
The other factor is the history depth that old credit cards offer. Even a tattered card with a bad history becomes valuable over time because, as time passes, it appears that a person has mended his/her ways by not even using the card any more. So, a card that hasn't been used in over two years starts to look good again. However, lending banks will target these unused cards for closure because they have no activity and offer no revenue.
Best advice, in general, is to keep all old credit card accounts open and in good standing. Use each one at least once every six months to keep them active. That way the bank won't close the accounts, but they will keep reporting them to the credit bureau as accounts ‘in good standing'. Credit history is so important to your FICO Score that it counts for 35% of your whole score. That's the highest percentage of all the categories. Missing payments and overcharging will hurt the most.