If you’re thinking about cleaning up your credit report by closing a credit card account or two that you haven’t used for years, you probably want to reconsider that plan. That’s because closing a credit card account can actually lower your credit score. How? One, by potentially reducing the length of your credit history, especially if you’ve had the account for a long time, and two, by reducing your available credit. Let’s break it down further.
Does Closing a Credit Card Hurt Your Credit?
The length of your credit history makes up about 15% of your major credit scores, including your FICO credit score. It looks at how long you’ve had credit by looking at the opened dates on all of your accounts. And your available credit has a direct impact on your credit utilization rate, which is how much debt you owe versus your total available credit limit(s). Your credit utilization rate is another important component of your credit score, accounting for 30%, for instance, of your FICO 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.
Should I Close a Credit Card?
With those points in mind, Thomas Nitzsche, media relations manager for ClearPoint Credit Counseling Solutions, said he advises clients to weigh their options carefully when it comes to closing a credit card.
“It’s important to remember that most of your credit score is based on payment history, so if you have an account with a long history of good payments you should generally keep it open,” Nitzsche said. “If the card does not carry a fee or have a high balance, I usually recommend that they keep the account open, particularly if they have had the account a long time.”
If the annual fee is the issue, Nitzsche said you can contact your issuer to see if they’ll waive it in exchange for keeping the account open. However, “if the client is in high credit card debt, then it could be in their best interest to close the account in exchange for a lower interest rate, as in a Debt Management Plan or creditor financial hardship plan,” he said.
If you’re considering closing a credit card account, here are some important things to keep in mind.
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. So do your credit score a favor and very carefully consider keeping old credit card accounts open. You may want to check your credit scores before you close an account. You can get two free credit scores, updated every 14 days, on Credit.com.
And if you think you’ll be tempted to use that card if it’s still open, you can always cut it up, put it in your safety deposit box at the bank or even put it on ice, literally, by freezing it like some people do in a block of ice.
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% of your credit line.
To maximize your credit scores, you’ll want your revolving utilization to be as low as possible, with 10% 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 consider keeping your revolving utilization low by keeping old accounts open and balances low.
If You Do Close Your Credit Card
If you’ve decided that the hit to your credit scores is worth it — let’s say you have a joint credit card account with your spouse and you’re going through a divorce — there are a few things you’ll want to keep in mind.
Remember, you may be able to close a card with a balance, but you’re still going to have to pay off the purchases — and you’ll want to aim to do right away since that available credit limit will be gone once the card is closed, even if those charges aren’t. Of course, you can always transfer the balance to another card, preferably one with a 0% balance transfer offer (bear in mind you’ll likely pay a nominal transfer fee to do so) and then close the account.
Second, you’ll want to confirm with your issuer that your card does, in fact, have a zero balance once you turn a blind eye towards the account. Be sure to check your account to make sure there are no outstanding charges or fees that could go through and then show up later as missed payment — which can also do big damage to your credit score.
Finally, after you’ve canceled, it’s a good idea to get written confirmation that the account is closed and the balance is zero. You can send a certified letter to your issuer’s customer service department requesting a confirmation letter.
Lucy Lazarony contributed to this report.