I just saw this article called “My credit card was cancelled” on the money section of CNN.com. In it a reader asks a question about why her credit card company closed her account and how it would affect her credit score. The answer was a new one to me…
Having a credit card with history benefits your credit score
I have always heard that having a long-running relationship with a credit card company is a good thing. For that reason we have kept our two oldest credit cards open while closing all the others. We also occasionally purchase something on them and quickly pay it off – supposedly activity on them is better than no activity.
These are the things I have heard in the past, so that is why we have done them. I honestly don’t care too much about my credit rating since I have adopted a bit of Dave Ramsey‘s philosophy. The only thing I intend to go into debt for is real estate and the .25% rate difference that we may get isn’t much of a concern for me, since I am planning to have it paid off in less than half the time anyway.
Don’t get me wrong, I am all about saving money by being diligent, but there are only so many hoops that I am going to jump through to keep the best possible credit score. I mean if you have ever read (the often-changing) list of dos and don’ts to have a good credit score it can make you feel like you are walking on a tightrope trying to appease Experian, Transunion, and the other one.
We just recently paid off our last credit card. We have been working the last three years to pay off over $30,000 of consumer debts. I love the feeling of not having credit card bills to pay each month and I am not about to put a balance back on my credit card to get me an extra 5 points on my credit score. But, that’s just me, if you are into that sort of thing, by all means have at it! 
Anyway, back to the article…
The answer that was given in response to the reader question was surprising to me…
“Credit-card companies lose money on dormant accounts, and as they feel the economic pinch, they’re more apt to close them. Unfortunately, as you suspected, closing your oldest card can lower your credit score. The length of time your accounts have been open is the third most heavily weighed factor in your FICO score (after timeliness of payments and the amount you owe). Plus, eliminating a card reduces your available credit, which could also lower your score.”
I didn’t know that they lose money on inactive accounts. I guess it is good to know. They went on to explain that…
“If you have a lot of other cards and a credit score of 720 or higher, one closure won’t have much effect on your score. But if you have a slim credit history and few cards, it’s wise to make sure your oldest accounts stay active. So use your card at least once every three or four months.”
What about you? Do you work on keeping a good credit score?
{ 15 comments… read them below or add one }
way to go paying off your credit cards…
Actually equifax and transunion like you to have more credit showing. They need at least two credit cards to create a credit score.
I don’t recommend cutting up credit cards as they create your credit history. Example… my mother has had one of her credit card since 1976… this means that she has a really good credit rating..
best,
I’m currently avoiding a credit card until I know that I can pay off the bill monthly. My credit score is surprisingly o.k. for having no credit (740ish). My dad uses his credit card to buy gas and pays it off monthly– a decent way to build credit, at least to start off with.
I’m more worried about my boyfriend’s score than mine– and his is better! Everything will be in his name when we get married so I just want to be a nice back-up
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I sincerely do not care about my credit score. I am more concerned with building my net worth, and its growth rate, which is a number that will tell more about my financial strength than some three digit number which is based on an arbitrary formula that nobody really knows exactly what it is.
@GettingUp
I agree!
My wife and I were talking about this just the other day. We’re Dave Ramsey fans, but we want to keep our credit scores up in the event we want to get a new mortgage or refinance the house. We plan on having our 2 oldest cards and using them ever so often only to turn around and pay them right off. We’ll never buy anything on them that we don’t have the money in the bank for though. We just paid them off and we’re never going back to that again.
Congrats on paying off the debt. Are you basically done with CC for good? Or just going to be more careful in order to fully pay the bill each month?
@Craig
we are basically done with them – my wife and I both carry a credit card in our wallets, but they are for emergencies only…
@Bob That’s pretty impressive. Do you use debit as well since basically that’s just cash? Curious to find out how that works for you and if it improves your situation. Besides emergencies, I’m assuming you use them if you have online purchases or somewhere that has to be paid in credit card, but that’s a great strategy to rely strictly more on cash.
Yea, we use our debit cards for just about everything…
Credit cards are often the first step for a consumer to build their credit score. Our overall credit history will determine how our credit is affected by having numerous credit cards. However, having an overabundance of credit cards with high balances or credit availability can negatively impact risk scores if our credit history is questionable. This advice was given to me by the financial advisers of bills.com. They were of great help to me.
Any financial account necessarily has some cost to it. Think about all of the people who are employed to service accounts (CSRs, database/software technicians, and so on). Accounts that are used defray these costs with finance charges, fees and transaction charges (paid by merchants), whereas dormant accounts do not defray any costs. For a few accounts, it probably costs more for them to go through the account closing process than to just let them stay open, but if there are a significant number of dormant accounts, it’s much cheaper to close them all. Of course, some larger companies probably do regular checks to see which accounts are dormant and should be closed, such as on a monthly or quarterly basis.
Why are all you people obsessed with your credit score? The bankers invented that term to get you enslaved with debt. Forget credit. Don’t buy what you can’t afford. Can’t afford a house? Rent. Save until you can buy a house one day. The same with your car. Buy a clunker to get to work. Save and then buy a better car later. Don’t waste money on idiotic things like Christmas gifts. Have you ever wondered who started that insane trend? Be wise.
Wamu/Chase Manhattan closed my credit card account for no reason at all and my credit score plummeted 25 points. I have not yet managed to return it to the original level and it took me years to get it as high as it was. They ruined my credit for nothing.
Three comments…
1. FICO score is an … I Love Debt Score.
2. Whenever you get a “same as Cash” offer – run and yell CHEETA!
3. Cash is king.
I didn’t care about my credit score either, until I realized that I’m 20 and can’t open a checking account without my parents. I intend to get a credit card, use it to buy the things I normally use my debit card on, and pay it off every month. It annoys me immensely that I have to get a credit car before I can get a different checking account. I guess I’m stuck with the credit card companies because I already bought my pickup with cash.
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