FAQ: Should I Close Old Retail Credit Accounts?
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
Each paid off open old retail credit account represents less 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 shift the 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 they are 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 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 them doesn’t mean they no longer count in the average age calculation as many people think. What it means is that old retail credit accounts will disappear completely after 10 years while 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 one 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.