Dear Opening Credits,
I'm young, but I'm no longer foolish about credit cards. I messed up badly with my first credit card about five years ago. It took me three years, but I've paid it off. Since then, I just use it and another card occasionally, and I pay them off every month. The interest rates are way too high for me to carry a balance, so I almost never do. I've read that you shouldn't cancel or close your oldest credit card account, but is that true in my case -- where the credit record on my oldest card shows my worst credit behavior? -- Responsible... now
Dear Responsible,
Canceling unneeded credit card accounts might seem to be a good idea, but it can be a mistake for your credit score. Glad you're thinking about the consequences before making the move.
In this case, you're probably better off keeping the card, despite the checkered past of your old mistakes.
Your credit score
A combination of factors determine your credit score, and though most credit scoring companies' formulas are similar, no two use exactly the same method. The FICO score -- easily the most commonly used by lenders -- uses the following guidelines in determining your credit score:':
Payment history: 35 percent
Your payment history includes a number of factors, such as whether you''ve been on time with payments to different accounts, including credit cards, mortgages and installment loans. If you''ve been delinquent, it considers how much you owed, how often you were late on payments, how long overdue the payments were and how long ago the debt was made whole.
Amounts owed: 30 percent
This will include how much credit is available to you and how much of that available credit you're using. In other words, it''s a look at your outstanding balances in relation to how much credit you have overall. This is known as your credit utilization ratio. If you are using too much of your available credit, it will count against you in your credit score. Other items are considered, too, such as what kinds of accounts you're carrying balances on and how much.
Length of credit history: 15 percent
Your length of credit history shows how long you've been a borrower. Generally speaking, lenders like to see a long credit history because it shows how you've acted with credit over time which makes it easier for lenders to assess what kind of risk you may be.
New credit: 10 percent
This looks at how many new accounts you have and how many credit inquiries have been made by potential lenders into your credit file. If you recently applied for a bunch of new credit cards, for example, lenders will see that as a negative.
Types of credit used: 10 percent
Lenders also want to see what kinds of credit you use, such as credit cards, mortgages, installment loans, personal bank loans, etc. It's good to show you can be responsible with different kinds of loans.
Should you cancel?
So should you cancel the card? Probably not.
The trouble you had with the card in the past won't be erased from your credit report just because you cancel the card. The account will still show on your report for about seven years after you cancel the card.
Another negative to canceling is that the move would lower your available credit, which will impact your credit utilization ratio -- the ratio of your outstanding balances compared to your available credit. In theory, you might be able to counteract that move by asking other lenders to raise your credit limits on your other cards. But in this economic environment, even borrowers with pristine credit are finding their limits slashed, so don't count on it.
You're probably benefiting more from the long credit history you have with the card, so I'd keep it.
Also, think of the big picture. Unless you're planning to apply for new credit in the near future, a minor change in your credit score won't matter much. If you continue your current good credit habits, your score will continue to go up over time.
Karin's money makeover column "Get With The Plan" can be seen every Sunday in "The Star-Ledger" and "The Trenton Times." She also hosts and writes "Money 911," a multimedia series for MSN Money. Before writing became her main focus, Mueller was the executive producer of CNBC's The Money Club, where she led the team that won the network's first ever Cable ACE Award for Business and Consumer Programming. Mueller lives in New Jersey with her husband, three kids, one guinea pig and one leopard gecko. Whatever they don't eat goes into her retirement savings accounts. A comprehensive archive of her writings is available on her Web site, www.KarinPriceMueller.com.
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