I hate loose ends, especially financial loose ends. If you have old accounts that you no longer use like credit cards, home equity lines or other bank accounts, you should close them. In case you need convincing, I've created a list of the reasons you should close unused accounts.
When ING kept sending me statements via email, I wondered what was going on. I logged into my account and found that I still had a home equity line open with them. I called ING and closed the account.
If you're like me, you're busy. You tend to forget small details. That's why it's a good idea to close accounts you don't use. It's just too easy to forget about them. Here's my list of reasons for closing old accounts (if you really need one).
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Prevent Identity Theft
If you've forgotten about the account, it's that much easier for a crook to take it over. You're not expecting to get statements so you won't notice if someone changes your mailing address.
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Prevent mistakes by the company.
If you've got an account you're not watching bad things can happen. The company can send out another credit card to an old address or they can charge you inactivity fees. You could end up owing money on an account you don't use. Worse yet you could become a victim of identity theft.
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Remove the lien on your house
If you have a home equity line, 2nd or 3rd mortgages then that company probably has a lien on your home. If you go to sell it it's one more thing you have to mess with.
I found out the previous owner's mortgage company "forgot" to clear the lien on my house. I was refinancing and I had to call the original title company and chew them out several times to get anything done. When you're trying to sell you house you don't want extra problems, you'll have enough, believe me.
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Cut down the clutter.
We get enough junk mail. We don't need additional statements, emails, etc coming in each month.
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Get if off your mind.
Mental clutter is worse than physical clutter.
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Avoid the temptation to spend.
If you have an open line of credit it's too easy to use it.
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Possible FICO Benefits
Closing accounts could either help or hurt your credit score, if you care about that sort of thing. I personally believe your FICO is worthless.
Take a few minutes and write down any accounts you don't use regularly. Then go through the list and contact each company over the phone or in writing and get the account closed.
I find it's good to clean up old accounts once a year or so. Get a free copy of your credit report and look over all the accounts. If there are some you don't use or don't recognize, call the company and get it taken care of.
You don't want to mess around with this stuff when you're trying to buy a new house. Worse yet, you don't want to get a collection call for an account you haven't used in a long time. It's worth a half hour of your time.
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Comments
5 Comments so far
I agree with you, keeping old lines is a bad idea even experts do say keeping credit cards open is better for your credit (% utilization, account age, etc).
I agree that keeping old unused checking and savings accounts open provides little to no benefit. I think that unless you are keeping unused HELOCs as a safety net, you probably should close them out also. But I disagree with all of your reasons for closing out credit cards. I just don't see the benefits, but I can see the downside–lowered FICO score–which will impact you negatively unless you are independently wealthly.
All of the risks and benefits you mentioned either have a remote chance of occurring or are de minimus.
…and how does closing credit card accounts help your credit?
Jeff,
Excessive lines of open credit is one of the standard reasons to turn down a credit application (credit card, mortgage, car loan). Credit scoring systems (FICO) will take this into account.
I used this reason (there are a fixed number of "turn down codes") the most frequently when turning down applicants. When you have 20 open credit lines, your debt to income ratio could be altered significantly if you decide to go on a spending spree. It happens more than you think, especially with job loss, medical problems and divorce.
Opening a large number of credit accounts in a short period of time is also red flag.
My major concern now is identity theft. I think the credit industry is under reporting the actual number of cases each year.
One of the best ways to fight it is to get a free copy of your credit report and make sure any accounts you don't use are closed.
Chris,
I've read that credit card companies will view excessive available balances on existing credit cards negatively, especially if you are actively seeking more credit or begin to agressively consume the balances. This, however, is the first time that I've read that FICO has incorporated this factor (excessive unused balances) into their scoring system, and further that removing these excess available balances offsets the positive FICO factors such as debt-to-credit limit ratio and length of credit history (if you close your longest held accounts). I guess I was surprised by that part of your post and wanted further clarification as to where FICO (or experts that work closely with Fair Issac Co) had discussed or recommended closing old unused credit card accounts to benefit your credit score.
I'm not too worried about ID theft, and of the three categories of theft (unused accounts, actively used accounts, and new unknown accounts) I'm less worried about unused credit card accounts as they have the smallest chance of falling into the hands of theives. I'm more worried that someone will illegally use one of my actively-used cards (as there is the increased risk of some employee stealing my account number when I make a charge), or illegally gain access to my SS# and start opening lines of credit. The latter requiring tons of work to clean-up including applying for new SS#, etc.
The only additional damage that can be caused when ID theives steal from unused credit card accounts is the potential for delay before you notice the theft. I, however, sign up for a cheap alert service ($50/yr for quaterly monitoring and FICO score), mainly to protect me from when ID theives open new accounts with my SS#, but also to help me catch other activity quickly.
Here's a recent MSN article listing 4 Credit Score Myths:
Myth #1 Closing accounts can help your credit score
"For the umpteenth time: Closing accounts can never help your credit score, and may hurt it."
http://articles.moneycentral.msn.com/Banking/YourCreditRating/4creditScoringMyths.aspx