Should You Close Your Old Credit Card Accounts?
If you’ve been in the personal finance realm for any period of time, you’ve probably heard one of the classic rules of credit cards: Don’t close those old accounts, or your credit score will drop! But is this really true, and are there times where it really is smarter to close your line of credit?
Will Your Hard-Earned Score Be Impacted?
One of the most complicated formulas around is that of your credit score. This is because you actually have a number of scores, depending on which company and formula is used to calculate it and which version they utilize. While the most common scores out there are the FICO® and VantageScore, even they have multiple versions that lenders can pull up. So, how do you know if your newly closed account will make a dent?
First thing’s first: the simple act of closing a credit card will not drop your score, in and of itself. However, removing this account can negatively impact a few different aspects of your credit score, depending on your other open accounts. Here’s where you’ll see the biggest effects:
Your Average Age of Accounts – This makes up approximately 15% of your credit score. Your average age of accounts (or AAoA) gives lenders an idea of how long you’ve been managing your credit, and how likely you are to develop lasting, successful relationships.
*If you close a credit card that you have had for a long period of time – *particularly if it’s your oldest credit card – your AAoA will drop. With it, your score may lose a few points. So, pay attention to how long you’ve had that card before you go calling to cancel.
Your Credit Utilization Ratio – This ratio is one factor in the “debts owed” part of your credit, which, as a whole, accounts for about 30% of your score. So, it’s hard to say exactly how much it plays into your actual score, but you can rest assured that it does matter.
This ratio is essentially how much money you owe to debtors as compared to your lines of credit. So, if you have three credit cards with limits totaling to $10,000, but have $2,500 sitting on those cards, your utilization ratio is 25%. It is said that you should ideally keep your utilization ratio below 20%, to avoid negatively impacting your score.
Before closing a credit card account, be sure that it won’t bounce your utilization ratio up too high. Let’s take an example: you have three credit cards, with limits totaling $10,000 (a $5,000 limit, a $3,000 limit, and a $2,000 limit). Between those cards, you have $1,500 in debt… that’s a ratio of 15%, which is great. If you were to close the $2,000 limit card, your ratio jumps to 18.75%, which is still good. However, if you instead close the $5,000 limit card, your utilization would skyrocket to 30% -- suddenly, your credit isn’t looking as good as it was yesterday.
Bottom line? Pay attention to this card’s details before closing it down. Is it one of your oldest accounts? Are you paying off other debts, where this would impact your utilization? Maybe you should reconsider, or simply cut it up and forget it exists.
When You Should Close an Account
With that said, there are a few times when closing an old, rarely (or never) used card is a good idea. The biggest reason is:
When it has an annual fee – If you have a credit card that is just collecting dust but brings with it an annual fee, it may be a good idea to cancel the account. As long as it’s not your oldest line of credit by a wide margin, and as long as it doesn’t have a substantially higher credit limit than your other accounts, the drop to your score should be minimal… if even noticeable at all. Paying an annual fee each year when you aren’t reaping any benefits from the card is rarely worthwhile.
Before canceling the card altogether, though, you may want to call the issuer. Sometimes, they will be willing to waive your annual fee, in exchange for keeping the account open. Other times, they may have another product that they can switch the account to, which doesn’t have a fee.
This is the case with the Blue Cash by American Express, for example. If you have the Blue Cash Preferred card, you’re paying an annual fee of $95. If you aren’t utilizing the card’s excellent cash back features (6% back at grocery stores, for starters!), then it isn’t worth the fee. In this case, you may want to call and be switched to the Blue Cash Everyday card, instead. You keep your credit utilization and average age of accounts, but are now carrying a product without an annual expense. Win-win.
Which Is Best?
Deciding whether to close old credit card accounts is a very individual thing. You’ll need to pull your credit report and see what your average age of accounts currently is, and how far it would drop if you closed the card in question. Also take a look at your credit utilization, and see if removing this card’s credit limit would impact that ratio substantially (if you don’t have any debt, this doesn’t matter).
If you still want to clean up your wallet, you have a few options. Call the issuer and see about dropping to a no-annual-fee product, rather than closing the account altogether, to avoid unnecessary expenses. If at all possible, keep the cards with the longest histories and highest limits, even if that means cutting them up or locking them in a safe.
Yes, closing a credit card can impact your score. Depending on the situation, though, you may find it worth the hit.