No headline provided

No headline provided

If there are old merchant cards and other credit cards taking upspace in your wallet, you may be tempted to close those accounts,since you don’t use them anymore. However, that would be a bad movefor your credit score. Eventhough you’re not using them, those old credit cards are helpingyour 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 thebreakdown 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 thateach factor has in relation to the others. Now let’s examine whyclosing inactive credit card accounts lowers your credit score.

The value of old credit

Those old, inactive credit cards you’re thinking about closingare actually helping your credit score because length of yourcredit history is worth about one-sixth of your overall score. Notonly should you leave them open and keep them helping your creditscore, you might even want to use them occasionally so the issuerdoesn’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 touse: debt-to-credit ratio. Your current credit balances, whenviewed as a percentage of total credit, are 30 percent of yourtotal credit score. Therefore, even though you’re not using thosecredit cards, the credit limit on each of them is actually helpingyou lower your debt-to-credit ratio, which is a sign of responsiblecredit behavior. Keep those accounts active and working for you byusing them occasionally.

Types of credit used

Although it’s only 10 percent of the total credit score, everylittle bit helps. Those old credit cards are contributing to thedifferent types of credit accounts in your credit history. Mostpeople have several different credit cards or revolving creditaccounts, and hanging on to your old ones is one way to cater tothe credit-score formulas used by the credit bureaus.

Any one of the reasons listed above is a good reason to maintainthose old credit accounts. However, when taken together and backedup with the facts, they’re even more compelling. Even if you onlyuse cards every now and then, credit and charge cards frommerchants are important facets of your credit score and credithistory. If you keep cards active, they may even save you money viabetter interest rates. Understanding the factors that affect yourcredit score and checking your free credit score annually, can putyou one step closer to financial freedom.

Courtesy of ARAcontent

Leave a Comment