Don't Erase the Signs of Aging

Funny how youthful indiscretions gain luster when recalled with close pals and past partners in recklessness. Too bad your lender's memory isn't as fuzzy. A banker's recall is as sharp as an ex with a grudge -- but when your financier has been wronged, it can legally let other interested parties know about it.

Luckily for those who have changed their charging ways, there's a time limit on how long your bad bill-paying behavior can be used against you. (TrueCredit offers Fools a cheap chance to see what rumors are being spread.) Most sins of spending past -- as well as positive notations on your credit report -- have a seven-year shelf life. After that, lenders must stop reporting the bad and ugly (although positive marks can be reported indefinitely).

What about those old lines of unused credit lingering on your official record like memories of that Flock of Seagulls 'do? Can you -- and should you -- erase the signs of aging credit? If there's inaccurate information on your credit report, compose a "Dear John" letter to get it removed. Doing so can greatly improve your overall credit score. Erasing other signs of aging won't necessarily make you more attractive to bankers. Consider the following:

Closing accounts doesn't undo anything. According to Fair Isaac & Co., once you acquire more than seven revolving debt accounts, your FICO score begins to suffer a little. However, all is not automatically forgiven by simply closing accounts to get below seven. Once you've opened the accounts, the damage is done.

Closing open accounts may actually hurt your FICO score. Lenders take a hard look at the ratio between the balances on your revolving accounts and your total available credit. If you do have debt, try to keep it to less than 30% of your available credit. (The ideal number here is, of course, 0%. Here are some tips to get you debt-free faster.) Go ahead and keep those lines of credit open (but don't be tempted by untouched lines). When you close open accounts, those credit lines are no longer factored into your ratio. Thus the percentage of debt/available credit will increase. Ouch.

Why deny the good? Removing old closed accounts that don't have any negative items is a bad idea simply because you benefit from a long credit history and those accounts speak to that credit history. (Remember, 15% of your credit score is determined by how long you've been borrowing. Here's how the rest of it is measured by The Man.)

Your lender may have a different perspective. Lenders are apt to penalize you for having too much available credit, fearing you'll one day snap and go on a spending binge that is well beyond your means. If this is an issue with your lender, you might want to talk about closing some accounts, as long as the lender also knows that your score could drop.

On the other hand, there's beauty in simplification. Consider the benefits of paring down:

  • Simplicity. Fewer cards are easier to track. In addition, you have a much better sense of your overall debt level when it's on one or two cards rather than spread across a bunch of them.

  • Less temptation. The more cards you have, the easier it is to rationalize excessive spending. But remember that your card's credit limits are not an indication of what you can afford to spend. Fewer cards with lower balances is your path to enlightenment (or at least peace of mind), grasshopper.

If you decide to streamline, carefully consider which cards you should cut. (Here's some guidance.) Performing plastic surgery should only be done after careful consideration.


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