You may not realize how much those old cards can boost your credit scores.
I recently received this question from a Money Talks reader:
I’m considering closing one or two of my old credit cards that I hardly use anymore. I would prefer to just simplify my spending, and a couple less cards are a couple less bills to remember to pay each month. Is this a smart move? Is there anything I should consider before cutting up these cards? Thanks for your help. — Taryn R.
This is an excellent question. When consumers open a new card, a lot of times there’s an initial urge to close out an old one. And why not? You’ve worn out the old card’s sign-up bonus and introductory period. The excitement of the old card is more or less gone, replaced by your shiny new card. So what good is it to keep the old card open?
Believe it or not, those old credit cards are beneficial to your credit score. And while closing a credit card (or cards) might help you to simplify your spending, it won’t help your credit score and in fact can actually hurt it. Why? Well, there are a couple of reasons.
First, closing that account lowers your total available credit. Eliminating some of your available credit can in turn increase what they call your “credit utilization ratio” — the percentage of your available credit that you’ve put to use. Many experts recommend keeping your credit utilization under 30 percent.
Because “amounts owed” — and credit utilization is a component of that — make up 30 percent of your FICO score, it’s always in your best interest to keep your credit line high and the amounts you owe low.
Second, once you close the account you essentially put a cap on how long that good-standing credit account will stay on your report. As credit expert Barry Paperno explained to Bankrate, closing a credit card account won’t affect your score immediately because that account will remain on your report for up to 10 years after it’s closed. But because a closed account eventually drops off your report, that means you’re eliminating a line of good-standing credit that you built up for years.
An open account will stay on your report for as long as it’s open. Because the history of your accounts makes up another 15 percent of your score, that’s another reason to keep your good-standing accounts open.
There’s really no good reason to close out an old account, unless one of these apply:
- You’re concerned about your spending.
- You’re paying a high annual fee on a card you hardly ever use.
To address that first concern, sometimes closing a credit card account is really the only way to keep yourself from spending. If this sounds like you, then you probably aren’t the kind of person who should have a credit card. Let’s face it, they’re not for everyone. Cutting yourself off from revolving credit might limit your ability to build credit over the course of a lifetime, but that’s a better option than falling deep into credit card debt down the line.
As for the second concern, unless you’re carrying one of the American Express Platinum cards, odds are you’re paying an annual fee of less than $100. I would argue that this is a pretty good price to pay to maintain an excellent credit score, which of course could save you many thousands in interest over the course of a lifetime. But that decision is really for the individual consumer to make and speaks to how important it is for a consumer to consider the long-term impact of a credit card before applying.
So to answer Taryn’s question, simplifying your expenses is probably not a worthwhile reason for closing a credit card account. My advice is to keep those old accounts open to benefit from the good-standing credit you’ve built as long as you can.