If you want to make sure your credit history is in the best shape it can be, closing any old and unused credit accounts is a good place to start.
But just why is this a good idea? And are there any situations where it’s better to keep them open? We explain all in our blog.
Your credit history
Did you know that a record is kept of your borrowing? Each of the UK’s credit reference agencies keeps an account that shows important information like when you take out a new credit card, loan or mortgage, how much credit you have available to you and whether you make your payments on time.
This is known as your credit history and is one of the things lenders look at to help them decide whether to approve any application for credit you make to them. If they can see that you always make your repayments on time each month and don’t spend over your agreed credit limits, they’re more likely to view you as a responsible borrower than if they can see that you regularly miss payments.
One of the things a credit history shows is how much credit you potentially have available. That’s where closing old accounts can become useful.
It’s not what you spend but what you could spend
If you have two credit cards, each with a limit of £1,000 on them, and you have a balance of £200 on one and £300 on another, you may see this as you only borrowing £500.
So when you apply for a loan, for example, you may feel that you can comfortably afford your repayments on top of what you’re paying towards your credit cards.
However, rather than just looking at how much you’ve borrowed, the lender you apply to may look at how much credit you have available if you were to max out your limits.
In the example above, while you have spent £500, you could spend £2,000. So a lender might decide on this basis that you have enough credit available to you and that adding more will be too much of a burden.
Another reason it’s a good idea to close an old account is if it’s no longer the most competitive deal you could get.
If you have an old credit card you don’t use because the interest rate is high and there are fees involved in using it, close it. If you used the old card responsibly, you may have improved your credit history and could be eligible for a better credit card deal anyway, so there’s no reason to hang on to your old one.
However, don’t rush to close all of your accounts just yet.
Keep some accounts open
Did you know that having no credit history can be nearly as great an obstacle to you getting credit as having a poor credit history? It’s therefore a good idea to keep at least one of your accounts open and to continue to use it responsibly, as lenders should look favourably upon this.
If you have missed a payment, this will remain visible on your credit history for at least six years. Even if you go on to clear the balance and close the account, this mark will still show up until the necessary time has passed.
And before you do close any of your accounts, make sure that the balances are all cleared. If you have several different credit cards with different interest rates you’re trying to keep track of, you could consider consolidating these using a balance transfer or money transfer card. You can find out more about this option here.
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