FAQ: Should I Close Old Retail Credit Accounts?

Old Retail Credit Accounts

FICO logo (Photo credit: Wikipedia)

Old Retail Credit Accounts

No.  It seems like a good idea to close old retail accounts but it’s not.  It’s natural to want to clean house and it’s really one of many counter intuitive practices of the FICO algorithm’s credit worthiness calculations.

Old Retail Credit Accounts Help “Time in File” and Debt to Credit Ratio

Paid off open old retail credit accounts represent more available credit that you have.  30% of the FICO score is based on the ratio of debt to available credit.  Closing the open available credit on old retail credit accounts will close out that amount of available credit.  This shifts the debt to available credit ratio in an unfavorable direction.

Don’t make the common mistake of thinking credit scores consider debt to income ratio.  FICO doesn’t care what your income is!  How’s that for counter intuitive?  What FICO is interested in is how you handle the income you have. The most important factor is paying your accounts on time.  The second most important factor in calculating your score is how much of the credit you have available to you you are actually using.  Income is irrelevant.  I have seen this mistake in the writings of many self proclaimed experts in national publications.

Another reason not to close out old retail credit accounts in most cases is that they likely add to the average age of your credit history.  This is another heavily weighted factor in computing your FICO score.  Closing old retail credit accounts doesn’t mean they no longer count in the average age calculation as many people think.  What it means is that age credit for old retail credit accounts will disappear completely after 10 years.  If open they will remain a positive factor far into the future.

New Retail Accounts Hurt, Old Retail Credit Accounts Help

It usually doesn’t make good sense to try to take advantage of a discount offered when you open a new store account.  It generates an inquiry which costs you a few points for a year.  It also reduces the average age of your accounts by adding in a brand new line of credit if you are accepted.  Average age of accounts or “time in file” is a key component of your overall credit score.  Don’t even consider opening store accounts unless you are making a major purchase.

 

Enhanced by Zemanta
The following two tabs change content below.
After practicing law for 37 years Edward F. St. Onge, Sr. now devotes all his time to helping consumers achieve a high credit score with amazing speed. Learn the counter-intuitive secrets to credit scoring through his down to earth instructions backed by extensive knowledge of the laws and trends. All of the latest tricks and techniques that they don't want you to know now at your disposal. At last a level playing field for the consumer!

Latest posts by Edward St. Onge (see all)

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>