To close or not to close…

We often get asked if it would be OK to close a credit card account, the easy answer is no. But also, I understand that everyone has unique situations and if you find yourself with a card that you either need to close or want to close there are a few precautions that you can take to protect your credit score with this action.

Why Closing Credit Cards Can hurt you

The popular answer to this question by many is that if you close your card you will lose the benefit of the age of that account.

Credit scoring models do include the age of your oldest account and the average age of your accounts when calculating your credit scores. 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.

Now that we have just dispelled that myth, here is the REAL reason why you do not want to close credit card accounts. The second largest part of your score is a factor of your current balance(s) on your credit cards compared to the limits on those cards. This is called your utilization ratio. In other words, the more available limits that you have on credit cards that are not being used, the better. Ideally it is best to only be using a small percentage of the limits on your credit cards.

If you have cards that you are not using but are still open, the limits associated with those cards are factored into your balance to limit ratios. If you start closing cards, you lose the limits associated with those cards which will make your balance to limit ratio higher which is bad. In most situations if you increase the percentage of credit you are using this will lower your credit scores.

Why You Might Need to Close a Credit Card

Usually it is always better to keep unused credit cards open, but there are a few exceptions to that rule.

You may need to close a joint credit card after a separation or a divorce. Another instance in where you want to close an account is because there is an annual fee associated with the account. Also, some creditors will close an account after long periods of inactivity.

How to Close as Safely as Possible

Regardless of the reason for closing an account it may be possible to do so with little or no damage to your credit score. Remember the real reason you don’t want to close an account is because it can affect (negatively) your 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.

Bonus tip:
If you are 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 after the loan has been closed or the new account has been opened before you close the account.

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