Friday, January 02, 2009

Credit Crunch Comes Knocking

If you're a megabank looking to reduce your exposure to a shrinking economy, whaddya do?

For starters, you slice your customers' credit-card limits.

Simple limit reductions are one way to accomplish this. Another way — and one which has now affected my household — is for banks to close old and unused credit-card accounts.

A few months ago, Chase sent me a letter regarding one of our card accounts. They'd noticed we were using one Chase card rather than the other, and so they had moved roughly half of the unused card's total spending limit over to the "more used" card. (It's "more used" because it offers cash back, kids. We have zero revolving debt.)

Included in that letter was an admonition from Chase: If we wished to keep the unused account open, we needed to use the card at least once by November 30, 2008.

Since that card's limit (after Chase's limit-swap action) was now only $4k, and therefore a small chunk of our overall credit limit, I elected to let the card lapse.

But I Overlooked Something...

We know that where credit scores are concerned, a user's debt-usage ratio is very important. It's computed as follows:

Debt-Usage Ratio

That ratio comprises roughly 30 percent of your FICO credit score. (Only your payment history is more important.)

When deciding whether or not to keep this particular card open, I figured that its $4k limit, since it comprised such a small amount of our overall credit limit, was too small to worry about. Keeping it open would mean little: Our revolving-debt usage ratio would be .046 rather than .049. Big whoop, right?

But I forgot to consider the card's age.

According to my TrueCredit (review) screen, we had opened this particular Chase account in 1999. It wasn't our oldest revolving account, but it was close!

Our next-oldest open account showed up in 2002. So if this Chase account had been our oldest, closing it would (in the future) shave three years off our credit-history age. And where FICO is concerned, older is better. (I've read that accounts "age" on your credit report for up to 10 years after they're closed. At that point, they supposedly drop off the report.)

Moral of the Story: If you're considering whether or not to keep a credit card open, be sure to consider the account's age as well as its available limit Both are factors in your credit score!

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— Posted by Michael @ 9:42 AM


I can't argue with your logic but the sad part is that it once again demonstrates how we allow the credit industry to manipulate our own financial decisions. I wish people would put up more of a fight instead of simply conceding to the power of the almighty credit score.

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Thoughts on my personal finances, goals, experiences, motivations, and accomplishments (or lack thereof).

My financial life began turning around when I took responsibility for it.
— Dave Ramsey


Start (2005-12): ~$21,900
Currently: $0
[About Our Debt Paydown]


Savings Goal: $15,000
Currently: ~$15,115
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