There are a ton of myths about credit. But one in particular just won’t seem to go away, especially because even so-called experts keep perpetuating it: Don’t close your oldest credit card because you’ll lose all the positive credit history associated with it.
According to Rod Griffin, that’s baloney. And he should know. Griffin is the director of consumer education and awareness at Experian, one of the three major credit reporting agencies.
Here’s the truth about closing cards and what it does to your credit.
How Closing Accounts Affects Your Credit History
Your credit score takes into account several factors, one of which is your credit history. It makes up 15 percent of your credit score, so it’s important to show you have a track record of borrowing and paying back money. The longer your credit history, the better.
Contrary to popular belief, you don’t immediately lose the history for a credit card when you close it, said Griffin. He explained that when you close an account that’s in good standing (that is, it has a $0 balance and you’ve never been late with a payment), credit bureaus keep that account on your credit report for 10 years from the date it’s reported closed.
Compare that with negative items — such as missed payments, accounts in collection and bankruptcies — which generally stay on your report for seven years.
“We keep the good stuff longer than the bad stuff,” he said. So unless you took out one credit card many years ago and haven’t borrowed money since, closing a credit card should have no impact on your credit history.
When Closing A Credit Card Does Affect Your Credit Score
That’s not to say you should begin closing credit cards with abandon. It is possible to harm your credit by closing an account, but it has nothing to do with your credit history.
Lenders want to make sure you aren’t too reliant on credit to cover your expenses. They like to see that you’re carrying a small balance relative to the total amount of credit available to you. This is often referred to as your credit utilization ratio, which you can calculate by dividing your total balance owed by the total amount of credit you have available.
For example, say you have three credit cards:
- Credit card A: $1,000 limit, $500 balance
- Credit card B: $2,000 limit, $1,200 balance
- Credit card C: $5,000 limit, $0 balance
If you add up all your balances ($1,700) and then divide by your total credit limit ($8,000), you’ll get a credit utilization ratio of about 21 percent.
How much you owe is one of the biggest factors that affect your credit; it accounts for 30 percent of your score. If your utilization ratio gets too high, your score can drop. Though there is no magic number, most experts recommend maintaining a credit utilization ratio of less than 30 percent to avoid any negative impact on your credit. All types of credit are considered, but revolving credit (namely, credit cards) is weighted much more heavily.
So how does this relate to closing an account? “The reason that closing a credit card account affects scores is because when you close it, you lose the available credit on that account,” said Griffin. “As a result, your utilization rate increases.”
Let’s take our example from above. Say you close credit card C because you don’t owe money on it and don’t plan to use it. Your total outstanding balance remains $1,700, but your total available credit drops to $3,000. That immediately causes your utilization ratio to jump to nearly 57 percent.
“So it looks like you have more debt as compared to your credit limits, and that causes your score to drop,” said Griffin. Typically, however, you’ll see your score rebound in a month or two. “Your utilization rate increased because you closed an account, not because you took on a lot of new debt.”
The other way closing an account can negatively affect your credit is by disrupting your credit activity. Basically, the algorithms used by credit scoring companies aren’t great at interpreting changes to your credit report right away. So a change in status from open to closed can cause a minimal and temporary drop in your score while they sort out what’s going on. Again, your score should return to normal in a month or two.
Although the negative effects of closing a credit card are usually not too severe, it’s a good idea be cautious if you plan to apply for another credit card or a loan in the near future.
“If you’re planning to apply for credit in, say, the next three to six months, it’s probably best to leave that account open,” said Griffin. “You don’t want your score to drop before you’ve completed that application.”
When Should You Close A Credit Card?
Closing a credit card isn’t ever going to help your credit score, so you should think twice before you do it. However, there are a few instances when you should go ahead and cancel a card:
You’re paying an annual fee. If the card charges an annual fee and you’re not reaping enough rewards to make the fee worth it, go ahead and close the account.
You’re struggling to stay out of debt. If you’re working hard to pay off debt and you’re worried about racking up a bigger credit card balance, it’s better to close accounts than to leave yourself open to temptation. In fact, it’s possible to close credit cards that still have balances; you just have to work out payment plans with your card issuers.
You have too many cards to keep track of. Just one charge that goes unnoticed can spiral into a mess of late fees and calls from collectors. Though there are tools you can use to keep tabs on all your accounts, if you don’t trust yourself to stay on top of all your cards, it’s probably best to get rid of any unnecessary accounts.
Choosing whether to close a credit card is up to you. Often it makes more sense to just leave it open rather than risk any hits to your credit score. But as Griffin pointed out, it’s always best to base your decisions on what makes the most sense for you financially rather than what might happen to your credit score.