Should I close old credit cards or keep them open?

Should You Close Old Credit Cards or Keep Them Open?

You just paid off a credit card. Victory! Your first instinct might be to grab the scissors and cut it up for good. But hold on a second.

That simple act of closing an account can have a surprisingly big impact on your credit score. Before you make a move, it’s worth understanding what’s happening behind the scenes.

Understanding the Impact on Your Credit Score

Closing a card feels like tidying up your finances, but it can accidentally ding your credit score. Two key parts of your score are at risk.

• Credit Utilization Ratio: This is the percentage of your available credit that you're currently using. It’s a huge factor, making up about 30% of your FICO Score. When you close a card, you lose its credit limit, which can make your utilization percentage shoot up.
• Average Age of Accounts: Lenders like to see a long, stable credit history. This factor accounts for about 15% of your FICO Score. Closing your oldest credit card can drag down the average age of your accounts, making your history look shorter than it is.

According to credit bureaus like Experian and score creators like MyFICO, closing a card with a high limit or a long history can cause a score drop of 10 to 50 points. That’s a hit you probably want to avoid.

When to Keep Cards Open

So, when is that old card a keeper? Most of the time, actually. If it checks these boxes, think twice before closing it.

• No Annual Fee: If the card isn't costing you anything, let it be. It’s quietly helping your credit score in the background.
• High Credit Limit: That big credit limit is a powerful tool for keeping your overall credit utilization low.
• Oldest Accounts: Your first credit card is a valuable part of your credit history. Keeping it open shows lenders you have long-term experience managing credit.

When to Consider Closing a Card

Of course, there are exceptions. Sometimes a card is more trouble than it's worth, and closing it makes perfect sense.

• High Annual Fees: Are you paying a hefty annual fee for a card you barely use? If the perks don't outweigh the cost, it might be time to close it. First, try calling the issuer to see if you can downgrade to a no-fee version.
• Poor Terms or Benefits: Maybe you've moved on to cards with better rewards or lower interest rates. Closing a card with subpar benefits can simplify your wallet.
• Risk of Overspending: If an open line of credit feels more like a temptation than a tool, closing it could be a smart move for your budget and peace of mind.

Real-World Examples

Let's make this real. Numbers can tell the story best.

Example 1

Imagine you have two cards:

• Card A: 5 years old, $10,000 limit, $2,000 balance
• Card B: 1 year old, $5,000 limit, $0 balance

Closing Card B won't change much. But closing Card A? Your utilization jumps from 13% to 20%, and your credit history gets shorter. That’s a double whammy for your score.

Example 2

You're getting ready to apply for a mortgage. A strong credit score is your ticket to a better interest rate, so keeping old accounts open is a good strategy.

On the other hand, if a travel card with a $95 annual fee is just collecting dust, closing it could save you money, even if it means a small, temporary dip in your score.

Common Mistakes and Considerations

Before you make the final call, watch out for these common pitfalls.

• Closing a Card with a Balance: This is a big one. It concentrates your debt onto fewer cards, which can cause your utilization ratio to skyrocket.
• Credit Mix: Lenders like to see that you can handle different types of credit. If this is your only credit card, closing it will hurt your credit mix, which makes up about 10% of your score.
• Future Credit Needs: If a mortgage, car loan, or other major financing is on your horizon, now is not the time to rock the boat. Keep your credit profile as stable as possible.

Bottom Line

So, what's the final verdict? For most people, the best move is to keep old credit cards open. This is especially true for cards with no annual fee, as they help your credit score at no cost to you.

Only close a card if the annual fee is too high or it's leading you into debt. If you do close an account, make sure your total credit utilization stays below 30%—and ideally, under 10%.

Want to see exactly where you stand? Track your credit score for free and see how your accounts contribute to your financial picture.