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This week’s reader question is one I’ve gotten many times, which raises the likelihood you’ve wondered about it as well. Here it is:
I have an excellent credit score of 835 and zero debt. I want to know if I should now consider canceling credit cards that I have not been using?
I had heard that if I let the card company cancel the card for lack of use, it will hurt my credit score. Is this true? — Matt
I’ll answer the second question first. If the card company cancels your card for lack of use, that alone won’t affect your credit score.
There’s a persistent rumor that when your credit report reflects that a card was closed by the credit grantor, this could negatively affect your score. False. Here’s part of an interview About.com did with a spokesperson from Fair Issac, the creator of the most widely used score, the FICO score:
About.com: When the credit card issuer closes a credit card, there’s often a comment left on the credit report, “Closed by credit grantor.” Is there anything about that comment that hurts one’s FICO score?
Fair Isaac spokesperson: No. It doesn’t matter who closed the card.
So who closed the account doesn’t matter. But there are two other potential concerns when closing accounts:
- If you have balances outstanding on other cards, it could raise your credit utilization ratio, which could hurt your credit scores. For example, say you have two cards, each with a $5,000 limit. One card has a $3,000 balance, and the other, the one you’re canceling, has a zero balance. Since you have $10,000 of credit available and $3,000 outstanding, your credit utilization ratio is 30 percent, which is the maximum most experts recommend. Canceling one card means your total available credit is $5,000, and you’re using $3,000, raising your utilization ratio to 60 percent. That could negatively impact your score.
- Part of your credit score is based on the length of your credit history. A longer history is better than a shorter one, so a bunch of old accounts is better than a bunch of new ones. Therefore, closing old accounts could theoretically lower your credit score. What many people don’t understand, however, is the FICO score considers both open and closed accounts, and closed accounts can remain on a credit history for up to 10 years. In short, even closing an old account won’t impact your credit score for a long time.
If Matt closes a card, he should remember to subtract that card’s credit limit from his total available credit, and never charge more than 30 percent of that available credit on his remaining cards.
Because closed accounts don’t immediately impact the length of his credit history, that’s not really a factor in Matt’s decision.
So in Matt’s situation, he’s free to close accounts, and he shouldn’t bat an eye if they’re closed by the creditor. But let’s answer his specific question: “I want to know if I should now consider canceling credit cards that I have not been using?”
Not using an account? Just ignore it.
As I explained, closing accounts can theoretically negatively impact credit scores. On the other side of the coin, it doesn’t hurt to leave old credit lines open, as long as you don’t have too many, are not being charged an annual fee and won’t be tempted to overspend.
Some people — including yours truly — hate loose ends. We pull our credit report, see an old, open credit card we no longer use, then want to tidy things up by closing it. But if it’s not costing you anything, leave it alone. It’s not hurting you, and could be helping.
So when you’re feeling anal, don’t worry about your credit history. Instead, rearrange your lap drawer or clean the refrigerator shelves. That’s more useful.
Bottom line: Unless there’s a reason to close an account, just stop using it. If you’re ever notified that your account will be closed for inactivity, and it’s one you want to keep, make a small purchase, pay it off, then place the card back in plastic purgatory.
Another reason not to close existing accounts: It’s a pain. Here’s the proper way to go about it.
Step 1: Pay it off
While you can close an account to new charges while it still has a balance, to completely close it you should pay it off. So if it’s time to say goodbye, it’s time to zero that balance.
Got any automatic payments hitting the card? Move them.
Once the balance is zero, don’t use the card. Wait a week or two, then check your account online and make sure no charges show up.
Step 2: Break the news — twice
Balance paid? It’s breakup time.
Call the customer service number on the back of your card or on your monthly statement. When you get a customer service rep, confirm that you have a zero balance. Then tell the rep you’re canceling your account.
While you’re on the phone, ask the rep for a name and address where you can send a letter to make it official. When you hang up, write a short letter to that name and address. It doesn’t have to be fancy. Just include your name, address and account number. Say you’re canceling your account and want your credit history to reflect you requested the account be closed.
Use certified mail and request a return receipt so you can prove the company received your letter.
Step 3: Follow up
Let a full 30 days go by, then go to AnnualCreditReport.com and pull a copy of one of your credit reports. The account should show “closed by customer,” not “closed by creditor.”
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The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.
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