Friday, September 14, 2012

Keep your oldest credit card open

Your old unused credit card might be taking up space in your sock drawer, or even your wallet, but closing that account is usually not a good idea
People close credit cards for many reasons:
  • They have trouble controlling their credit card spending
  • They aren’t using the credit card often
  • They don’t want to pay an annual fee
  • They don't find the rewards beneficial
  • They think that it gets rid of the debt (it doesn't)
  • They had a bad experience with the company they took personally
You should always try to keep your oldest credit card account open if possible.  It shows credit issuers that you are able to handle credit responsibly and will only help to improve your credit score.  Having a good credit score will provide you with the best interest rates on mortgages, auto loans, and give you access to the best new credit cards.  

The 5 main factors that affect your credit score:
  • 35% Payment History
  • 30% Credit Utilization (debt-to-credit ratio)
  • 15% Length of credit
  • 10% Type of credit
  • 10% New credit accounts and inquiries

Your oldest credit card account should never be closed.  The longer you've had credit and paid on time, the better.  Read my previous article for more information on improving your credit score.

Closing your oldest credit card will damage your credit score in several ways:

Shortens your credit history
10% of your credit score is based on the length of your credit history.  The longer your credit history, the less risk you present to lenders.  While closing your oldest card won't damage your credit history right away, 10 years down the road, your old closed account will fall off your credit report and give you a drop in your credit score.  The longer your average age of various credit card accounts the better.

Decreases your total available credit
This ultimately increases your total credit utilization.  30% of your credit score is calculated based on your credit utilization.  The best credit situation to be in is to have a lot of unused credit because this keeps your total credit utilization low.  Low credit utilization is looked upon favorably by lenders.  

Decreases your different types of credit
Not having enough credit cards can be harmful to your credit.  10% of your credit score is based on different types of credit that you have (personal loan, mortgage, credit card, student loan, car loan, etc) and so you should keep a few credit accounts open.  

Even if your oldest credit card no longer entices you to use it because it doesn't have any benefits you like, you should still use it once every 6 months to prevent the bank from closing the account due to inactivity.

Did you know that you can also convert your oldest credit card into a different credit card, while keeping your oldest credit history?  This process is called a Product Conversion or Product Change

Banks (like American Express, Chase, Bank of America, Capital One, Barclays, etc) offer different types of credit cards.  To do a product change, simply call the number on the back of your oldest credit card and tell the customer service representative that you would like to have your credit card converted to a different card.  Then ask them which cards you can change to. 

Make sure you tell them that you don’t want to close your account.  You want to keep the credit history but change your credit card into a different product.  Also, make sure they are not doing any hard inquiries on your credit report.

The process usually takes several weeks depending on the issuing bank.  There is no fee or credit inquiry performed when doing a credit card product conversion.  The main downside to having a product conversion of your old credit card is that you will not be eligible for any credit card sign up bonus for the card you switch to.

If you've already closed your oldest credit account, that's okay.  Just remember to keep your next oldest credit account open now and let it age gracefully on your credit report.  My first credit card was opened while I was in college in 2000 and it continues to be one of the driving factors keeping my credit score high today. 

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