I have had clients, Mortgage Lenders, Investors, Real Estate Agents; people from all walks of life ask me when they should close an account. When I hear them ask, my immediate response is to shout, DON’T CLOSE ANYTHING… until you understand the consequences of your actions.
“Never” is relative and there are times to do and times not to close your accounts. Here are several things to consider before you close an account.
1 – Credit history identity theft repair is a very important part of scoring and the longer the history, the more it will count toward a better credit score. Even if you don’t use the card, keep it active by buying a small item each month and then pay it off at the end of the month to keep the history alive and working for you. If you close an account that is over 7 years, you will lose this history and the points associated with this history. The more history with an account, the more it will cost you in points.
2 – A new account with derogatory’s could be closed and increase your score because a new account hits your credit score 7 different ways. However, if you are just establishing your credit and you need the account, it is better to keep the account and PAY YOUR BILLS ON TIME! We will go over this later when we talk about new credit. A new account could be new up to 4 years.
3 – If you have too many new accounts, then closing one that is rarely used could be helpful in increasing credit scores. We will talk about this when we talk about Balancing Our Active Accounts. For the time being, look at keeping an equal number of Revolving accounts with Installment accounts. We will go into far greater detail later.
4 – Department stores are notorious for offering a discount when you sign up for their credit card in the checkout line. Be cautious when tempted to use this as it costs you points in 7 different ways and perhaps will not save you any money at all, but cost you. Let’s give an example…
You have a hundred dollar purchase at XYZ Company and they offer you a store credit card at 17% interest. They will give you a 10% discount if you sign up for them right there. They will charge the full amount then give you the discount and save you $10 immediately. You do so and feel good about saving $10 on your purchase. Now, you get the first bill and you are charged $1.27 in interest charges. If you pay it off, then you only have your credit scores hit 7 different ways to deal with. However, if you don’t have the cash, then you pay the minimum and your savings from the sale are reduced to $8.73. If you are late, then there is a $39 fee attached and your interest rate goes to 23%, or 29% or 33% making things even worse.
We all think that it won’t happen to us, but these are uncertain times and keeping our credit scores clean and in the mid 700’s is like a financial insurance policy. You may need it when you least suspect it.
