Is it Bad to Close Credit Card Accounts?
If you want your credit score to be as high as possible, then it is never good to close your credit card accounts, says MSN Money financial columnist Liz Pulliam Weston. Not only will closing your accounts not help your score, it could hurt your score. A better course of action would be to pay off your credit card accounts and keep them open.
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Confusion
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The confusion from this issue might stem from certain lenders telling people that having too many open accounts can hurt your credit. That may be true, but it is not the entire story. Once you have too many open accounts, you have already done the damage. Closing the extra accounts does not repair the damage, according to MSN Money.
Available Credit
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When you close accounts, your total available credit shrinks, which causes your balance to take up a larger percentage of your available credit. This is called changing your credit utilization ratio, and raising the ratio hurts your score. Kiplinger provides a good example. Suppose your credit limit is $50,000 and your balance is $10,000. Your credit utilization ratio is 20 percent. If you close a card that has a $20,000 limit, your ratio becomes 33 percent. It's best to keep the ratio of available credit to the amount you use to below 20 percent, Emily Davidson, credit card expert, told the Kiplinger website. Keeping credit utilization ratio to less than 10 percent is ideal. But keeping it at zero is not good either. You want to show that you can manage credit.
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Credit History
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Shutting credit card accounts also hurts your credit score because it hurts your credit history. Closing your account can make your credit history appear younger than it really is. Length of credit history is one of the factors that go into your credit score, and credit-reporting agencies love to see that you have old, established credit, says Davidson. On the flip side, if you have bad credit on old accounts, shutting them won't help your score because negative credit history remains on your credit report for seven years whether you close the account or not. If you have good credit history, closing your account will only hurt that history.
Close Newer Accounts First
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If you want to close some of your credit card accounts to prevent identity theft or just because you do not want to keep track of them anymore, close the newer cards first, suggests Davidson. Close one card at a time and see what happens by requesting a copy of your credit report. You can get a free copy of your credit report once every 12 months by contacting AnnualCreditReport.com. Closing five or six accounts at once is not a good idea, says Davidson. And, closing an account prior to applying for a big loan is a particularly bad plan.
Expert Insight
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Barry Paperno of FICO, the credit scoring company, told Bankrate.com that, from a scoring perspective, there is never a good reason to close a credit card account. When you close your account, it does not matter if you close it or if your credit issuer closes it for you. Both are negative as far as your credit score is concerned. If you still want to close a credit card account, Paperno says it's better to close a department store card instead of a bank credit card. Credit-reporting agencies weight cards differently, he explained.
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