More credit Q&A: “Should I close my credit card account?”
Lately, I’ve been getting agitated by all the media attention surrounding credit scores and the negative impact of closing a credit card account.
It seems every article out there detailing the latest credit card woes, such as cut credit lines and increased minimum payments, also warns customers about closing their accounts, as if it’s credit score murder.
I wanted to address this issue because there are a lot of people out there that make it seem like you should never, ever close credit card accounts.
Unfortunately, this seems to benefit the credit card issuers more than consumers; after all, if we can’t close our credit card accounts, there’s a decent chance we may use the cards in the future and run into trouble.
Let’s get real for a minute here; if you don’t use a certain credit card and you’ve got numerous open accounts with positive credit history on them, it’s okay to ditch a credit card or two.
In fact, I recently closed two credit card accounts that I hadn’t used in a year, as I had about six other active credit cards.
Your Available Credit Will Drop
Sure, my available credit will drop, as those lines of credit are no longer at my disposal, and my credit utilization rate will rise as well.
By keeping credit card accounts open, you keep the history of the card active, and the available credit balance is counted in your overall credit profile. If you close a credit card account with a $5,000 credit line, you’re essentially wiping out $5,000 of your total available credit.
But this isn’t always a negative. You see, I’ve got plenty of good history on my other credit cards and I keep balances low to nil, so it’s not a concern for me.
And hey, even if I hadn’t closed those credit card accounts, they may have closed anyways by the card issuers themselves.
Chase actually closed one of my credit card accounts without notifying me, presumably for complete inactivity for several years.
I didn’t really care. In fact, they saved me the trouble.
When It Could Hurt Your Credit Score
Now let’s look at the other side of the coin; if you don’t have much credit history or you’re in the process of (or plan to) apply for a loan, it’s best not to tinker with your credit card accounts. At all…
Closing a credit card account can lower your credit score for reasons I mentioned above, so it’s best not to mess with it during crucial times like applying for a mortgage or auto loan.
Many mortgage lenders require prospective borrowers to have 3 active tradelines with a two-year history on each. Imagine if you had three, but closed one recently. And were then denied a loan.
It’s also not advisable to close a credit card account if you’ve only got one or two, as you may need those accounts to build positive credit history, or heck, buy lunch.
Similarly, if you have credit cards with years of history, it’s probably best to keep them open and active, and close newer, less valuable accounts with little payment history.
Your credit score can actually take a hit if you’ve got too many credit cards (why is my credit score low?).
So if you think that might describe your situation, and you’re interested in closing one or two, start with the ones with the least history, or perhaps the ones with the most negative information (how to cancel a credit card).
Let’s Set the Record Straight
I think it’s gotten to the point where Fair Isaac, the creator of the Fico score, should step in to address the matter. They should at least tell consumers it’s okay to close their accounts, and that the impact will be relatively minimal if they have other accounts with decent associated credit history.
Obviously, if you’ve got only two credit cards and one is maxed out and the other is free and clear, it’d be wise to keep the latter one open so it doesn’t look like your entire credit profile is maxed out.
But if you’ve got seven credit cards, five of which are free and clear, it’s okay to close a few. Cancel away…it shouldn’t hurt your credit much or at all. And even if it does, it should be temporary, because it’s not a “negative” event like a missed payment.
Tip: If you have limited credit history, keep your credit cards open, and try to link each one to a monthly payment you make, such as a cell phone or cable bill. Then pay it off in full each month. This will keep the card active and build positive credit history.
Even if the APR is high and you’ve got low interest credit cards that you normally use, it can still benefit your credit score.
Just understand that you do not need to carry a balance to improve your credit score!