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Why Closing Old Credit Accounts puts your Credit Score at Risk

do not close older credit accountsConsumers with lengthy credit histories can often have over 20 or more credit accounts on their credit reports. Some of your first retail credit accounts can continue reporting to the credit bureaus even though they have been inactive for many years.

While you may be tempted to close old accounts you should resist. Closing an old credit account puts you at risk of damaging your credit score because it may change the amount of available credit, even though unused, that helps calculate your credit score.

Having unused, available credit is an asset to your credit scores. FICO, the most widely used credit scoring formula, looks favorably upon high available credit limits. It makes sense that consumers with old credit accounts with zero balances are viewed favorably.

The scoring formula calculates the total available credit limits compared to total account balances which is the amount of credit you are using. The larger the gap between unused credit and available credit, the better your score will be. It appears as though you are managing debt very well.

If you close older credit accounts the gap between your available credit limits and the amount being used is reduced which may cause your credit scores to plummet. It may be easier to keep up with fewer accounts but if you have an unused older account, especially if it is a high credit limit, keep it open!

You may be surprised that the older inactive credit accounts, with high limits are the most important contributing factors to your credit score.

You do not want good information deleted from your credit reports. As long as the account remains open, the Date of Last Activity continues to update monthly, without you having any purchasing or payment activity on the account. If you have an excellent history of making payments on time there is no reason to have this information permanently removed by closing your account.

The bigger issue with older accounts is that the creditor may close the inactive account because it is no longer generating revenue and you are no longer an asset to the company.

You can prevent this from occurring by intermittently using the credit account, perhaps once or twice every few months for small purchases. Make sure you pay the account in full when making the small purchases.

There is no need to incur interest charges on small purchases. By utilizing an old credit account you can ensure the account will remain open and your credit scores will get a boost with a good payment history.

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