Some credit card accounts lie dormant, and many responsible credit card owners are inclined to close those inactive accounts. Should you? It depends.
Before you close an inactive credit card, there are a few important factors you should know.
First, it’s important to understand the effect closing an account has on your credit score. You might think that having fewer credit cards would indicate greater financial responsibility and less risk of debt, and therefore a higher credit score. Not so. A great FICO score depends on several contributing factors: the amount of debt you have compared to the amount of credit available to you (30%) and the average age of your accounts (15%) are outweighed only by your payment history (35%). The remaining factors are the variety of credit products you use (10%) and the number of recent inquiries into your credit (10%). Like FICO, the VantageScore places significant weight on debt utilization and the age of your accounts. These are the two factors most likely to be affected by closing an account.
This is how closing an unused credit card account can hurt:
1. Your total available credit will go down, so if you have credit card debt, your utilization ratio could rise.
Example: The credit limit on card A is $12,000; the limit on card B is $3,000; the limit on card C is $500. The total available credit is $15,500. Let’s say you have $1,000 in outstanding debt. The current utilization is about 6.5 percent (1,000 divided by 15,500). If we close card A, your utilization jumps up to nearly 29%. But if you close card C, the utilization is nearly unchanged.
2. If you close a very old account and leave only new accounts open, the average age of your credit file could go down.
Closing an account does not remove it from your credit report summary. After they are closed, accounts in good standing remain on your credit report for ten years from the date of the last activity reported on the account. Negative items remain on your credit report for seven years plus 180 days from the time the account went into its most recent delinquency. So, while open accounts continue to age indefinitely, a closed account will fall off your credit report after seven to ten years, and that could cause the average age of all of your accounts to go down.
Granted, if you close any of the three cards in the earlier example, the average age won’t be affected by much even after it disappears from your credit report. For example, closing the oldest card will leave you with an average age of 12 years when it finally falls off your report, as opposed to 15.33 had it remained open (assuming no new accounts are opened). Either average is considered healthy.
The point is that very aged accounts work in your favor to balance out new accounts. People who enjoy periodically taking advantage of signup bonuses on new accounts should be particularly concerned with keeping old accounts open in order to maintain a high average account age.
Anecdotal evidence indicates that for an outstanding FICO score, the average account age should be at least 8-12 years, and the oldest account age 18-20 years.
These comparisons only take age and credit limit into account, but you’ll need to consider other factors before making a final decision about closing an account. A card with an annual fee might not be worth its cost. Also, although credit card issuers can’t charge an inactivity fee on a consumer credit card account, lots of people carry business versions of the cards and many of them are subject to maintenance fees for nonuse over extended periods of time.
A critical consideration is your ability to resist the urge to make charges that you can’t pay off. If having a credit card lying around is a temptation that you might not be able to resist, close the account.
Even if you choose to leave the account open, the card issuer might decide to lower your credit limit or close the account if it isn’t used. The closed account will have the same effect on your credit score whether you close it or the bank does.
If you’ve got a low-cost, old credit card account that you want to keep active on your credit report, ensuring that the card issuer doesn’t close the account, set up one bill to be paid automatically with it each month. You can also set up the credit card to be automatically paid from your bank account so that you don’t miss a due date or inadvertently accumulate a balance.
If you decide to close an account, be sure to keep proof of its closure.
