With exciting new credit card deals being offered through the mail and on the Internet, it’s no wonder that disposing of old credit cards is on many people’s minds. Substituting old cards for new and improved offers with lower rates and better reward options is common practice and may be a wise financial decision. But even though your old credit cards have been tossed in a drawer with no expectation of being used again, they may still have an important role to fill. So when, if ever, is it OK to cancel your inactive credit card accounts?
The Impact on Your Credit Score
The main reason for keeping old credit accounts open is that they continue to provide value to your credit score. The once common held belief that an unused account is a negative factor has been debunked with studies clearly showing that there’s no direct impact unless it’s the only credit card you own. In many cases, keeping inactive accounts open is GOOD!
Even if you don’t actually close an old credit card account yourself, if you allow it to go unused for any length of time the credit card issuer may decide to cancel it. If the card wasn’t a vital part of your daily financial needs it may seem harmless to let the account go dormant and get closed by the issuer, but your credit score could be damaged, if as a result of an account closing you loose a significant portion of your available credit and skew your debt-to-credit ratio.
Prevent Old Account Closings
If you’ve had a credit card company unexpectedly close an inactive account, you want to do everything you can to prevent the same action from happening in the future. To avoid having an old credit card account closed by the issuer, make a small purchase every few months with each card that you don’t plan on using on a regular basis. An easy way to keep old accounts active is by signing up for auto-pay on necessary services such as your cable or cell phone bill. Not only will keeping the account active prevent an unintended account closing, but it may also forestall the issuer from decreasing your credit limit; another action that will lower your debt-to-credit ratio and impact your credit score.
The number of active accounts you have has no bearing on your credit score; however how much of the available credit you use is a major factor. Because of this, unused credit cards are an easy way to provide more available credit while lowering the percentage you’ve borrowed. In addition, older, more established accounts have more weight that newer ones. So if there’s a question about which accounts to close and which one’s to keep open – always keep the oldest accounts open.
Potential Targets for Fraud
Recent news stories report that dormant accounts may be vulnerable to con artists. Crooks are well aware of the general apathy of consumers towards accounts that are no longer being used and may target them specifically. If account access is established on a dormant credit card account, new cards can be created and used for months without being noticed.
While the damage can be significant if left unchecked, closing accounts that you don’t use is simply too risky to your financial future, especially if you regularly carry a balance on your active cards and are using a significant portion of your available credit. The best solution is to be vigilant and monitor your inactive accounts by logging in online or checking your statements each month. It’s easy to lessen the damage and prevent this type of crime by reviewing your credit reports at least once per year, focusing on any account discrepancies. If you do find a problem, contact the appropriate credit reporting agency and resolve the error.
In addition, Federal law protects you from any unauthorized purchases on your inactive credit card accounts. If your account has been breached by a crook report it to the credit card issuer immediately. No matter how much damage has been done, you cannot be held liable for more than $50. Banks often provide built-in fraud protection tools as well, limiting the chance that fraud goes undetected.
With so much protection in-place, there’s really no reason to close your inactive accounts. Keeping at least one old credit card active will expand your available credit and help ensure a strong credit rating. Why risk a drop when you need to make a large credit card purchase? An extra account or two may provide the security blanket your credit score needs…
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