Tuesday, November 3, 2009

Should You Close a Credit Card Account and Open Another One?

There was a financial advice column in the Denver Post on November 1 that incorrectly stated that closing a credit card with an annual fee and opening another one without an annual fee would have little effect on a person's credit score. That is simply not true. The length of time that an account is open has a great impact on credit scores. The longer an account is open, the higher the scores.

In addition, many lenders now require a minimum of three credit accounts to be open and active for a period of at least 12 months. Some lenders require one account to be open and active for a period of 24 months.

The most important thing to keep in mind when thinking about credit scoring is that the scores are meant to be an indication of a person's use of credit. If someone keeps closing accounts or only has one account, there is no way to tell whether that person is wisely or unwisely using the credit that is available to them. If someone has three or more credit cards and keeps a low balance on all of them, that is considered to be a wise use of credit and they will have a high score. If someone closes accounts because they can't trust themselves, or because they "don't believe in credit cards", or because they have received bad advice, that is considered to be an unwise use of credit and their scores will go down.

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