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Are your customers thinking about closing credit card accounts?
Have them consider these five questions to help them decide.

Consumers often are advised not to close credit card accounts because doing so can negatively impact their credit scores. The following submission to Ask Experian explains why credit scores should not be the only factor in their decision and provides five questions they should ask before deciding to close credit card accounts.

Dear Experian,

I’m thinking about closing some credit card accounts. I am concerned about the economy and don’t want to get stuck with more than I can handle if I lose my job. But I have heard that closing accounts will hurt my credit scores. Should I close the accounts?

— GBH

Dear GBH,

When you close an account, it creates a sudden increase in your overall utilization rate (how much of your available credit is being used), which is an indicator of credit risk. This can cause a dip in your credit scores. However, there are times when it makes sense to close accounts, and the impact on your credit scores might not be as severe as you think.

Although consumers have been reducing their available credit during the economic downturn, average scores have not slipped abruptly. Nationally, the average VantageScore® declined from about 774 at the beginning of 2006 to a still-solid 769 at the end of 2009. To learn more about VantageScore, go to http://www.experian.com/consumer-products/vantage-score.html.

If you’re considering closing accounts, the impact on your credit score should not be the only factor in your decision. Consider these five questions before deciding to close a credit account:

  1. Are you stretched to the limit and struggling to make your minimum payments? Closing accounts can remove a temptation to make additional purchases that could exceed your financial limits.
  2. Are you planning to apply for a major credit purchase in the near future? It’s important that your credit history be stable prior to and during the lending process, particularly for large purchases such as a home. It’s also wise to plan ahead and close an account several months before applying for a loan.
  3. Does the account provide incentives such as airline miles or cash-back offers? You may not want to close such an account if these benefits are important to you.
  4. Does the account have an interest rate or fees that are lower than other accounts you hold or might acquire to replace it? It may be financially advantageous to keep the account open and consider closing an account with higher costs.
  5. Do you use the account or carry a balance? Cards you never use and that have a zero balance are good candidates for closing because they aren’t benefitting you and are not profitable for the lender.

Generally, keeping accounts open is beneficial to your credit history, so carefully weigh any decision to close an existing account. The best credit histories typically include active credit card accounts that are used and paid promptly each month, demonstrating good credit management.

Thanks for asking.

If you have any questions about Experian and what it can do to help you support your customer relationships, please send them to clientcorner@experian.com.

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