NEW RULES FOR CARD COMPANIES + CLOSING UNUSED ACCOUNTS

Last May I blogged about the proposed credit card changes by the Federal Reserve to crack down on unfair and deceptive card practices. Fortunately for consumers, the rules were passed last week. Unfortunately, the changes won't take effect for another year and a half (July 2010)! You can read my prior blog for a summary of the changes.


Today, I want to write about a growing phenomenon with card companies right now -- closing the cards of inactive accounts. Many people are wondering how this might impact their credit. How [or whether] your credit (score) will be impacted will largely depend upon your 'bigger' credit picture. Questions to ask ...

--> How many credit cards do you currently have? If you have several cards (I will call this more than 4), you have "enough" cards and closing one from that standpoint won't harm your credit. If you have 3 or fewer cards, closing one will lower your credit score. You may want to consider keeping the account open.

--> How long have you had the card? Age of other cards? If you have other [open] card accounts that you have had longer, closing a card with a shorter history will have a minimal impact; if the card being closed is the card you've had for the longest period of time, the impact will be larger as you will in effect be 'shrinking' the age of your credit history.

--> How much [if any] credit card debt do you have? If you pay your balance(s) in full each month, no problem. The higher the level of debt, however, the greater the impact (negatively) to your credit. Suppose you have $2,500 in CC debt and your total credit limits on your cards totals $10,000. Your debt to limit ratio is 25%. If the closed account had a credit limit of $5,000, your debt is obviously the same ($2,500) but your debt to credit limit ratio would now be 50% ($2500/$5000).

As a rule of thumb, if you have a high credit score with a strong mixture of credit, I wouldn't be overly concerned about the impact that a closed credit card account would have. If you want to keep your accounts open and active, the advice of consumer advocates [is said to work with most card companies]... Make at least one purchase every 6 months on the card - amount of purchase does not matter - and your card will be kept in an 'active' status.