A Credit Score Common Misconception

The credit card companies are a tight knit group of people, in the sense that they don't like sharing much information with the general public. For example, they don't often, if ever, divulge their methods of computing an individual's credit score. Because of this and the lack of solid information available, many people are uncertain as to what does and what does not affect their credit score. This can often lead to confusion and inappropriate action, which can be detrimental to your credit score.

For example, many people would have you believe that decreasing the number of credit accounts you have will improve your score. This isn't necessarily true. You'll often hear thing to the effect that if you pay off some of your loans now then it'll increase your credit score, or if you close some particular credit account your credit score will increase. This simply isn't the case, however, even though it may seem a little strange to begin with.

The first main reason that it may not be appropriate to close one of your accounts is that credit companies give good credit scores to long-standing accounts. So, for example, if you have some small credit card that you've had for years (maybe since college or something similar) and you don't really use it that often, you should opt to keep this card. The reason being that you've had the card for a long period of time and it's, presumably, been paid frequently and so from the credit bureau's point of view it is a sound investment and so they will reward your credit score accordingly.

Another reason for not closing a number of credit account in the hopes of increasing your credit score is that if you close all of your accounts, you'll likely be opening a few more up immediately afterwards. If you cancel your credit cards, for example, you've likely done this to get a new card with a much better interest rate, however, this requires you to make a number of credit score and account inquiries, which decreases your credit score.

Also, closing a number of unused accounts will cause your relative debt amount to increase. Meaning that if you are using, say $100 out of $1,000 worth of credit and you close a number of accounts so that you now are using only $100 out of $150 worth of debt then you appear to be in a worse financial situation because you are close to maxing out your available credit.

Now, while it is true that closing credit accounts will likely make your credit score drop, it will only occur in the short term. Meaning that doing these sorts of things will have a negative repercussion if you are intending to take out a new loan in the near future. If, however, you don't have any such plans then closing your unused accounts and paying off accounts is beneficial to you since it will increase your long term credit score.

Remember that you need to take into account a number of things before taking any action on your current credit score and situation, a good idea would be to contact a financial advisor or at least make sure that you do your research before committing to any one plan.