Keep Your Credit Cards!

A sensible way to clean up your credit is to keep your credit cards.  Notice that I said keep, not use.

It’s smart to cut up a credit card or put it where it’s not easily accessible (like in a block of ice, seriously).  A person in debt may also think that’s it’s a wise decision to close the account — which is wrong! As far as your credit score is concerned, closing a credit card (balance or not) can be very detrimental.

You should not close down the following credit card accounts:

• If your credit card has a balance, your credit report will show your available credit as 0, but your balance will remain.  Unfortunately, the ratio of how much debt you have to your available credit reflects 30% of your credit score — so when your available credit for an account is $0 and you have $2,000 worth of debt on there, it looks like you’re beyond maxed out.

• If you close your only credit card, it may be the only revolving credit account type you have on your credit report.  Generally, a more diversified credit report with a variety of different types of accounts has a better credit score.

• Cards that are old.  The age (the length of time you’ve had accounts) is factored into your credit score.  Lenders also look at your credit history for the ability to pay a debt for the long-term, that’s why retirees are able to get loans easier than younger adults.  It’s not because the lending institution has a biased against young folks, it’s because the older you get, the older your accounts are.

Of course, there are perfectly logical times when you should close your credit cards.  If it’s a newer card or you have many more, that’s fine.  Also during situations of identity theft and fraud, you may be instructed to close your accounts to limit any damaged caused.