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Old cards carry less credit score weight

December 6, 2013
Ask Erica
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QHi Erica,

I want to get a credit card for unknown emergency uses. I do not have a card right now because I've been using my debit card for everything. The last time I had a credit card was five years ago. I canceled it because I almost never used it, so figured I didn't need it. Can you tell me if that old card is going to help or hurt me when I try to get another one now? – Stan

ADear Stan,

Assuming you closed that card in good standing (not owing anything), then a credit card you closed half a decade ago won't affect a new creditor's decision much if at all. Though the account is probably still being listed on your credit reports, what you had done with it is considered ancient history. If you were constantly delinquent with the card, that checkered past could hurt you, but, even then, your more recent credit behaviors (such as payments on any loans you have) would count more for or against you than that old card would.Ask Erica

You see, a financial institution's perspective is fairly similar to what an individual's would be when it comes to lending money. Imagine that a casual acquaintance asks you for a loan. He'd make it worth your while by paying you interest and fees. While enticing, you still don't know the guy personally, so to make sure he's good for it, you'd check to see how he has repaid other obligations. You may care a little about debts he acquired and managed ages ago, but what he has done lately will really matter to you (as will his income).

That's precisely why most credit scoring models, including FICO, weigh recent credit report data more heavily than older information. A late payment made five years ago has considerably less impact on a score than one made in the past five months.

So back to you: Assuming that you have no current and active accounts, you most likely have what's called a thin credit file. That means that there might not be enough information on your credit report. So how can an issuer feel confident that you'll pay back any debt you acquire with the card?

The answer: with collateral.

Your best bet is a secured card. Yes, I carry the flag for these products because they are an easy and effective entry point for people who want to do business with hesitant credit issuers. You show them the money (a cash deposit that they hold in a special savings account) and they send you a credit card. Done. The limits are usually fairly low (and usually correspond to the size of your deposit), but if you demonstrate a steady pattern of charging and paying the bill off in full and on time, the issuer may increase it after about a year. Or, since your credit rating will improve with all that perfect borrowing and repaying activity, go ahead and apply for a new card that is unsecured and has a higher limit.

You also mentioned you want the card for a crisis situation. In general, that's a fine idea. You never know what will happen in life, right? You may need to come up with a few thousand dollars but not have access to such funds quickly. A credit line that you can tap into can be a real lifesaver.

However, credit cards are payment tools, not savings accounts. You may designate the card for unexpected expenses, but be very careful when determining what they are and how you will deal with the resulting debt. If you can get by without charging, do. Always make a supreme effort to find alternative ways out of a financial problem — such as creating and regularly contributing to an emergency savings account. If you do choose to use the card for an emergency, plan for swift repayment. If you let it linger, the debt you now have will only add to your troubles. Trust me on this.

Got a question for Erica? Send her an email.




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