Keep accounts open to help your credit score
If you have a credit card that you have had for a long period of time (5 years or more) it may be in your best interest to keep the card open rather than closing it. There's a balance between credit capacity, credit history and outstanding credit when calculating your credit score.
Your credit score is made up of 5 components:
- Payment history - 35%
- Amounts owed - 30%
- Length of credit history - 15%
- New credit - 10%
- Types of credit used - 10%
Keeping an account open with a zero balance is a plus for length of credit history and amounts owed. In fact, myFICO.com (the agency that develops credit scoring models) doesn't recommend closing accounts as a short-term strategy for raising your credit score. If you're in the market for a new credit card that better meets your needs, then keeping accounts open makes sense.
Credit card companies use risk-based modeling, including your credit score, to determine your credit line and the interest rate they'll charge on account balances. Applying for credit creates a credit inquiry on your credit report. That inquiry stays on your report for two years but is only used as a factor in computing your credit score for one year. Applying for a couple of credit cards in a short period of time can lower your score, so you should consider doing it one card at a time, a year between cards.
