Leaving Unused Credit Card Accounts Open May Be Better for Your Credit Rating

Even in the world of credit reporting there are certain trends and methods that keep changing over time. It was believed at one point of time that one should close unnecessary and unused credit accounts because they enhanced the perceived risk that the consumer poses to the lender. The credit scoring model is also considered this factor into their risk of calculation. It was believed that a consumer who had unused credit available to him was a high risk as he had the potential of running himself under a huge debt that could in turn cause him to default on his existing payments.

However, that thinking has evolved somewhat. Now what is considered more important is the debt utilization ratio. Debt utilization is the ratio between amount of credit that is available to the consumer and the amount he actually utilizes. Credit card companies and other lending institutions now recognize the fact that many consumers may have a lot of open credit card accounts owing to pre-approved offers that result in a consumer getting a lot of credit cards. While you should try and keep only those many credit cards that you require, once you have ended up having multiple credit cards, do not be in a rush to close these accounts even though they are unused. Doing so will increase your debt utilization ratio.

For example, if you have 4 credit cards each with a limit of $1000, then your total credit limit is $4000. Let’s say you use one or two of these credit cards and carry an average balance of $500 on each. Out of the total limit of $4000 you are utilising only $1000. This means your debt utilisation ratio as far as you credit cards are concerned is only can affect is only 25%. Now if you suddenly close 2 of your aunt used credit cards, your total credit limit available will become $2000 and your debt utilisation ratio will jump to 50%. This kind of a change in increase of the debt utilisation ratio does more harm to the credit score than having unused credit accounts open.

For this reason in the current times and in view of how much weightage credit scoring model gives to debt utilisation ratio, a consumer is usually advised to not close open and unused credit accounts.

Bear in mind that every situation is different. If you feel that having unused credit accounts is going to prove detrimental to your situation by being too much in the way of being a temptation to use than perhaps it is a better idea to cancel the extra credit cards. The idea is to have one or two credit cards that you use and a regularly in order to demonstrate your ability to keep and manage credit. If you feel the need to close extra open accounts in order to reduce clutter in your financial portfolio, then perhaps you can take that step. Just make sure that you don’t cause any sudden changes in your credit report right before you are planning to apply for a new loan or credit.

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