To close or not to close? Here’s what to consider
If you haven’t used a credit card in a while and have transferred or paid off its balance, you may be tempted to close it. However, automatically closing it might not be a good idea because it could still be helping your credit score.
In this post...
Reasons to To Keep Your Credit Card Open
When you close an account, you’re shrinking your available credit, which can harm your credit utilization ratio. The more credit available to you, the lower your credit utilization ratio will be. Anything less than a 10% credit utilization rate will help your credit score– but anything over 30% utilization will hurt it. A low ratio is more important to potential creditors than the total available credit because it suggests a good credit risk.
Plus, an open account with unused credit could come in handy in an emergency.
Additionally, a longer credit history with older cards is an indication that you are successfully managing your debts. If you are young and have a short credit history, closing the account could hurt your overall credit score. However, if you are older and have a longer credit history, closing the account would have less of an affect on your score.
Keep in mind that even if you close an account, the history of that account will stay on your report for ten years, so if you are replacing the old card with a new card and a similar available balance, your credit score shouldn’t take a big hit.
When Should You Cancel a Credit Card?
There are two cases in which you should consider canceling an old card: (1) the card has an annual fee and you no longer use it or (2) you can’t control your spending and may be tempted to charge more than you can afford. If you do cancel a card, make sure to pay off the balance first and redeem any remaining rewards.
Bottom Line
The bottom line? Follow these tips to make sure your decision is helping and not hurting your credit score (or your bottom line):
- In deciding whether to keep a card with an annual fee, contact the credit card company and ask if the card can be downgraded to a no-annual-fee account.
- Don’t keep an old card if you might be tempted to charge more than 30% of its available balance.
- If you do cancel a card, open a new card or ask for a credit line increase on an existing card in order to maintain the same credit utilization ratio.
- For any card that you decide to keep, keep the card active by using it occasionally and keeping the balance low.
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