Dear Mary: I am a retiree and maintain a good credit rating but it could be better. That being said, I discussed that with my insurance people who said having charge cards open with no balance is a strike against you in achieving that. That took me by surprise.  I currently have one active credit card and pay the balance each month. However, I do have  three charge cards from clothing stores, which are seldom used. Balances are always paid off each month.

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Are inactive charge cards keeping my credit score low even though they never carrying revolving balances? Joann

Dear Joann: I must take exception to what your insurance people told you. That information is not correct. Whoever told you that closing any credit card account will improve your credit score is misinformed. On the contrary, closing any credit card accounts will effectively lower your credit score. 

It is important for you to understand that Insurance companies use a different credit score when determining premiums than the score a bank will use to issue a credit card account or mortgage. 

Your “insurance credit bureau score” originates using the same information (from Equifax, Experian and TransUnion) used by financial services, but also considers information on previous insurance claims. If you filed an auto claim or a claim against your homeowners insurance, for example, that is considered and can lower your insurance credit bureau score. 

This will explain why your insurance credit score may be lower than say the score you received from MyFico.com or one of the credit bureaus. 

There is one thing I’m sure we can all agree on: credit scoring is complicated!

Dear Mary: Are you saying that closing a credit card affects your credit rating? I agree to a card for a discounted purchase and immediately close when item is paid off!  Is it better to cut up the card but leave it open at zero balance? Judith

Dear Judith: That is exactly what I am saying. Yes, the inquiry into your credit file followed by issuance of the credit account further followed by closing the account–all three actions will drive down your credit score. Once the damage is done, it’s not easy to reverse.

But it gets worse. Statistically, that retailer knows the chances of you not closing the account after all, and going on to use it to run up revolving debt are much greater than you carrying through with closing it. Why else do you think they would offer you that discount and require every store employee to offer it to you? It’s not like they care about helping you to save money. They are looking at their future profit margins. They are strategically building a big platform of interest-paying customers using very reliable statistics.

Start thinking like a retailer and stop thinking like a consumer. It’s a crazy world out there and the more people they can convince to open these accounts to get a one-time discount, the better off they’ll be. And you? Not so much if you keep falling for these marketing gimmicks. 

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