Thinking about cleaning up your credit report by closing a credit card account that you haven’t used for years?
Credit utilization is an important component of your credit score. So in terms of your credit score, closing credit card accounts that you don’t use is one of the biggest mistakes you can make.
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Why Closing a Credit Card Account Hurts Your Credit History
Positive credit information, such as a long-established credit card account with a positive payment history, may stay on your credit report indefinitely. But when you close an account, it is usually removed from your credit report within 10 years.
Once that account is wiped from your credit report, you lose the credit history associated with the account and because the length of your credit history accounts for about 15 percent of a FICO score, your credit score takes a hit.
So do your credit score a favor and keep old credit card accounts open.
Why Closing an Account Hurts ‘Credit Utilization’
The amount of revolving credit card limits that you are currently using is called your “revolving utilization.” Let’s say you have a credit card with a $10,000 limit and a $2,000 balance. You are utilizing 20 percent of your credit line.
This measurement, also known as “debt-to-limit ratio” or “credit utilization,” makes up about 30 percent of your credit score. It measures each of your individual revolving credit card accounts plus the total credit limits and balances of all your revolving accounts on your credit report.
You can see what impact your credit card accounts have on your credit score by using our free Credit Report Card.
To maximize your credit scores, you’ll want your revolving utilization to be as low as possible, with 10 percent, or lower, being ideal for most people.
An open credit line with a roomy credit limit and zero balance will help to lower your revolving utilization, when you carry balances on other accounts.
So keep your revolving utilization low by keeping old accounts open and balances low.