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Beware of Canceling Credit Cards

Nothing jogs the money memories quite like a credit report.

Ah, yes, I remember that Limited Express outfit (in the days before The Limited and Express were two separate stores). I believe I received 15% off my purchase for signing up for their charge card.

Oh, look! It's Providian. My very first Visa. (Sigh.)

Macy's? I don't remember Macy's in my charging repertoire.

Funny how lines of credit outlive those fond shopping memories. It's probably safe to say that those credit cards stashed snugly in your wallet aren't the only ones on your official record. So should you close those 18 open lines of unused credit listed on your report? Will removing old information about already closed accounts make you look more attractive to bankers?

Closing accounts will not 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 should go on the chopping block. (Here's some guidance.) You might sleep more soundly at night knowing that the only credit in your name is what's snugly in your wallet on your nightstand.

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