THE COLOR OF MONEY
Closing accounts of unused credit cards can improve credit rating

By Michelle Singletary
The Washington Post

If this is the year you promised to improve your credit standing, one place to start is to close unused credit card accounts.

There are at least two reasons to do so.

First, credit security experts say that you may be less likely to actively monitor the status of old or inactive accounts. If a fraudulent charge was made on the card, it might take you longer to notice.

Secondly, unused credit card accounts can drag down your credit score, which is used by lenders to determine how much of a credit risk you are. Lenders use your credit score as a component in how they set the interest rate they will charge for a loan. It's unwise to have too much available credit—even if you haven't used the credit card in a long time.

"In the last 10 years or so there has been an explosion in terms of credit and number of offers available out there" said John Danaher, chief operating officer for TrueLink, a California company that sells credit monitoring and identity protection services to consumers. "As a result people have to be proactive in closing down inactive accounts."

But before you cancel your unused credit cards, consider the following checklist from these two credit experts—Steve Rhode, president of Myvesta, a nonprofit financial management organization, and Audrey O'Dell, newsletter editor for TrueCredit.

• Get a copy of your credit report from all three of the major credit bureaus (Equifax, (888) 766-0008, www.equifax.com; Experian, (888) 397-3742, www.experian.com; TransUnion, (800) 888-4213, www.tuc.com). You may have forgotten a credit card account you opened just to get a promotional discount.

• Look for the cards that you've had the longest because they're the ones you want to keep open. Your credit score is bolstered by a long credit history that shows responsible credit card use.

• If you have credit card balances — especially if you're applying for a loan soon—don't close inactive accounts all at once. Closing the accounts can lower your credit score because any credit card balances you have will look a lot larger when compared with your remaining available credit. Space closures over time. If you don't carry credit card balances, go ahead and close unused accounts.

• When you call to cancel a card, be prepared for a pitch to stay a customer. If you have good credit, this may be a chance to lower your interest rate. But be firm if your mission is to close unused accounts. You should aim to have just two or three credit cards.

• You can close your accounts by either calling or sending a letter to the customer service department of the credit company. You should receive an account closing confirmation letter in 10 days. If you do not, contact the company again to check on the status of your account. Don't give up until you receive a confirmation. Keep notes of anyone you talk to.

• Generally you should avoid having credit card balances that are higher than 75 percent of your available credit limit because this can cause a major drop in score (up to 200 points), according to O'Dell. For example, if you have a credit card with a $10,000 credit limit, you should keep your charges well below $7,500. Balances near 50 percent of your limit may cause a slight drop in your credit score (10 to 50 points). If you keep your balances below 35 percent of available credit limit, your credit score should remain unchanged. If the new balance on a lower-interest-rate card would push you above 50 percent of the available credit, you'll need to carefully weigh the savings against the possible impact on your credit score.