Perhaps you opened a store card to get a discount on your purchase and have never been back to that store. Maybe you got a credit card at your favorite gas station and have since moved to an area with different filling stations. If you have a lot of old credit cards that you no longer use, you may be wondering—is it bad to close old credit card accounts?
As with most things related to your credit, the answer depends on a number of factors.
When will it lower your credit score?
There are two ways that closing an old credit card could lower your score. The first has to do with your debt-to-credit ratio, or credit utilization. This is the second-most important factor when determining your score, behind payment history. To maximize your credit score, you want to use no more than 30% of your available credit. Thus, if closing an old credit card puts your credit utilization at over 30%, your score could decrease.
Say you have three credit cards with total available credit of $10,000 and you are carrying a balance of $1,500 on one and $1,000 on another. This $2,500 in debt means you are only using 25% of your available credit. You decide to close an old credit card that carried no balance but offered you $2,500 in available credit. When you close that card, your available credit will drop to $7,500, which means your $2,500 in debt is now equivalent to 33% of your available credit. Since you are now over the 30% threshold, your credit score may decline.
The other circumstance when closing an old credit card could lower your credit is if you are canceling one of your oldest cards. This could lower the average age of your credit accounts. Credit history is the third-most important factor in determining your credit score, and if you close your oldest accounts, you could damage your credit.
When is it okay to close old credit cards?
Feel free to close an old credit card if it will not affect your credit utilization. If you are not carrying balances on your other credit cards or if the card in question has a very low credit limit, you can close the account without much impact. Often, secured credit cards and store credit cards offer low balances and high interest rates, so these probably have little effect on your score.
Another instance when you might want to close an old credit card is if it charges an annual fee. The majority of credit cards have no annual fee so it usually is not wise to have a card with an annual fee. You will still want to consider what impact this could have on your credit utilization, but if it is costing you money each year to have that card, it may be better to close the account and focus your efforts on paying off your debt.
Finally, if you have trouble controlling your spending just by having this credit card in your possession, you should definitely cancel the card. The hit on your credit score will be minor in comparison to the additional debt you may incur by unnecessary spending.
Final Words of Advice
If you have several open accounts and want to close some of your cards, you may want to consider closing your newer ones before the older ones. If they have only been open for a short time, they could be lowering the average age of your credit accounts and hurting your credit score. If the newer card has more favorable terms, call your old credit card company to see if they can match the interest rate and/or reduce, or even eliminate, the annual fee. If your credit has improved since you first opened the card, you may get a better interest rate.
Additionally, you do not want to close your only credit card. Since 10% of your credit score is determined by your mix of accounts, you will want at least one credit card to show you have a variety of accounts and that you can responsibly handle credit.
If you do decide to close your credit card, you should call the issuer and say you wish to close the account. They may try to convince you to stay by offering better interest rates. If you still decide to close the card, inform the representative and then send a letter confirming your wish to have the card closed. After a few months, check your credit report to make sure the account is reported as closed.