If there are old merchant cards and other credit cards taking up space in your wallet, you may be tempted to close those accounts, since you don’t use them anymore. However, that would be a bad move for your credit score. Even though you’re not using them, those old credit cards are helping your credit score in a number of ways.
To better illustrate how and why those unused credit cards help, it’s good to know how your credit score is calculated. Here’s the breakdown on how credit scores are calculated:
Payment history: 35 percent
Amount of money owed: 30 percent
Length of credit history: 15 percent
New credit requests: 10 percent
Types of credit used: 10 percent
Those are the factors that go into determining your credit scores and the weight that each factor has in relation to the others. Now let’s examine why closing inactive credit card accounts lowers your credit score.
The value of old credit
Those old, inactive credit cards you’re thinking about closing are actually helping your credit score because length of your credit history is worth about one-sixth of your overall score. Not only should you leave them open and keep them helping your credit score, you might even want to use them occasionally so the issuer doesn’t close the account for you.
Amount of money owed vs. credit limit
There’s a term for this that lenders and credit bureaus like to use: debt-to-credit ratio. Your current credit balances, when viewed as a percentage of total credit, are 30 percent of your total credit score. Therefore, even though you’re not using those credit cards, the credit limit on each of them is actually helping you lower your debt-to-credit ratio, which is a sign of responsible credit behavior. Keep those accounts active and working for you by using them occasionally.
Types of credit used
Although it’s only 10 percent of the total credit score, every little bit helps. Those old credit cards are contributing to the different types of credit accounts in your credit history. Most people have several different credit cards or revolving credit accounts, and hanging on to your old ones is one way to cater to the credit-score formulas used by the credit bureaus.
Any one of the reasons listed above is a good reason to maintain those old credit accounts. However, when taken together and backed up with the facts, they’re even more compelling. Even if you only use cards every now and then, credit and charge cards from merchants are important facets of your credit score and credit history. If you keep cards active, they may even save you money via better interest rates. Understanding the factors that affect your credit score and checking your freee credit score annually, can put you one step closer to financial freedom.