In my “Money, Purpose, Joy” workshop, I always get lots of questions in the section on credit scores. And one of the most common questions is whether to close old, unused accounts. The general answer is no, as explained in detail in this helpful Bankrate.com article.
The main reason to keep the account open has to do with credit utilization, which counts for 30 percent of your credit score. Credit utilization is the amount of available credit you are using. If you have a card with a credit limit of $5,000 and make $1,000 of purchases, your credit utilization is 20 percent. It’s best to keep it at 10 percent or less. What some people don’t realize is that credit utilization is based on total credit available. So, if you have two cards – each with a $5,000 limit – and charge $1,000 on one card while not using the other, your credit utilization is 10 percent. But if you close the unused card, your utilization suddenly jumps to 20 percent. That’s the main reason why it makes sense to keep an old account open.
By the way, some issuers are closing accounts or even charging fees for cards that people aren’t using. So, if you have an account that you’d like to keep open but are not using it, you should probably use it every now and then. And of course, always pay your credit card balances in full each month.
I advise my client to use their credit cards every 3 months. BofA is notorious for closing inactive cards. If the banks are closing our cards due to inactivity then it can hurt both our utilization ratio along with history. Losing the history is more damaging then the utilization ratio.
Beth – I double checked with my contacts at Fair Isaac, the organization that created credit scores, and they tell me that yes, it does include department store cards.
Does this also include department store credit cards? Or is it just major credit cards?