You work hard to maintain good credit scores, but the truth is that even one seemingly innocent mistake has the potential to undo your efforts. Credit mistakes like late payments, collection accounts, or maxing out your credit cards can quickly turn your previously impressive credit scores into something much less attractive. That means higher interest rates on future loans, which can add up to thousands of extra dollars paid in interest.
Closing old credit card accounts is another credit blunder that has the potential to lower you scores. But, it’s not a guarantee that it’s going to happen. If you have a credit card account that you want or need to close, there are precautions you can take to protect your credit scores while still ridding yourself of an undesired account.
Why Closing Cards Can Hurt Your Credit Score
There is a rather stubborn credit myth about the impact of closing a credit card account and what it means for your scores. The myth is that when you close an old credit card account, you will lose the benefit of the age of the account.
Credit scoring models like FICO and VantageScore do indeed consider the age of your oldest account and the average age of your accounts when calculating your credit scores. However, closing an account does not remove its history — including its age — from your credit reports.
Not only will the history of a closed account remain on your credit reports, but credit scoring models will continue to consider the age of the account as well. And, even better, a closed account continues to age. So, if you closed a five-year-old credit card today… in 12 months it’s going to be a six-year-old credit card.
Now that we’ve debunked the myth, here’s the real reason why closing that old credit card account might hurt your scores: Credit scoring models consider the relationship between the balances and the credit limits on your credit card accounts. More specifically, credit scoring models will calculate your revolving utilization ratio or, in other words, how much of your available credit you utilize in the form of credit card balances.
The ratio is calculated by adding up the balances on your plastic and dividing that number by the sum of all your credit limits — even on still-open cards that you’re not using. That means that even if you’re not using a card, the unused credit limit is helping to keep that usage ratio lower. If you close that account, you’ll immediately lose the value of the unused credit limit, and your scores will likely go down by some amount. That’s why you often read articles about the dangers of closing credit card accounts.
Why You Might Need to Close a Credit Card
In most cases, it is not advisable to close an unused credit card account due to the potential negative impact on your credit scores. Unless it’s truly necessary, you should probably leave your credit card accounts open.
There are, however, exceptions to that rule.
You may need to close a joint credit card account after a separation. Another instance where you may want to close a credit card account could be when you have a card in your wallet with an unattractive annual fee. And you may cause the accidental closure of an account by not using the card for some long period of time. Card issuers hate inactivity, because inactivity means no revenue.
How to Close an Old Credit Card Account as Safely as Possible
Regardless of your reason for closing a credit card account, with proper planning it may be possible to do so with little to no credit score damage.
Remember, the real reason closing an old account might harm your credit scores is because the account closure could raise your revolving utilization ratio. However, if all your credit cards already have $0 balances, then closing an unused account will not increase the utilization ratio. Therefore, the closure of your account will likely have no impact on your credit scores in this situation.
Just to be safe, if you’re really committed to closing a credit card account you should think about the timing. Don’t close the card if you’re thinking of applying for a loan or another card. Wait until you close on the loan and then close the account. That way you save any potential score drop for after you’ve already been approved.
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John Ulzheimer is an expert on credit reporting, credit scoring, and identity theft. He has written four books on the topic and has been interviewed and quoted thousands of times over the past 10 years. With time spent at Equifax and FICO, Ulzheimer is the only credit expert who actually comes from the credit industry. He has been an expert witness in over 230 credit related lawsuits and has been qualified to testify in both federal and state courts on the topic of consumer credit.