Should I close old credit cards or keep them open?

Should You Close Old Credit Cards or Keep Them Open?

Deciding whether to close an old credit card or keep it open is a common dilemma for many credit cardholders. Your decision can significantly impact your 💡 Definition:A credit rating assesses your creditworthiness, impacting loan terms and interest rates.credit score💡 Definition:A credit score predicts your creditworthiness, influencing loan rates and approval chances., which in turn affects your ability to secure loans, rent apartments, and even get favorable insurance rates. In this article, we’ll explore the factors you should consider before closing a credit card, including how it affects your credit score and financial health.

Understanding the Impact on Your Credit Score

When you close a credit card, it can negatively impact your credit score in two major ways: increasing your credit utilization ratio💡 Definition:The percentage of available credit you're using, calculated by dividing total credit card balances by total credit limits. and lowering the average age of your accounts.

• Credit Utilization Ratio: This is the amount of credit you’re using compared to your total available credit. It accounts for about 30% of your FICO Score💡 Definition:A three-digit credit score (300-850) calculated by Fair Isaac Corporation, used by lenders to assess creditworthiness.. By closing a card, especially one with a high credit limit, you reduce your total available credit. This can increase your utilization ratio, potentially lowering your score.
• Average Age of Accounts: The length of your credit history💡 Definition:Payment history reflects your record of on-time and late payments, influencing your credit score significantly. makes up about 15% of your FICO Score. Closing your oldest accounts can reduce this average, leading to a decrease in your score.

According to Experian and MyFICO, closing a card with a high limit or long history can result in a score drop ranging from 10 to 50 points, depending on your overall credit profile.

When to Keep Cards Open

For most people, keeping old credit cards open is beneficial, especially if:

• No Annual Fee💡 Definition:Yearly charge for having a credit card—$0 to $550+. Premium cards charge fees but offer rewards that can exceed cost for high spenders.: If a card doesn’t cost you anything to keep open, it usually makes sense to maintain it.
• High Credit Limit: Cards with high limits help keep your credit utilization low.
• Oldest Accounts: Your oldest credit cards contribute positively to the length of your credit history.

When to Consider Closing a Card

While keeping cards open is generally recommended, there are scenarios where closing a card might make sense:

• High Annual Fees: If a card charges a high annual fee and you’re not using it enough to justify the cost, it may be worth closing. However, consider downgrading to a no-fee version first.
• Poor Terms or Benefits: If you have better cards with superior terms and benefits, closing a less favorable card could be beneficial.
• Risk💡 Definition:Risk is the chance of losing money on an investment, which helps you assess potential returns. of Overspending: If a card tempts you to overspend, it might be better to close it to avoid accumulating debt💡 Definition:A liability is a financial obligation that requires payment, impacting your net worth and cash flow..

Real-World Examples

Let's look at a couple of scenarios to illustrate the impact of closing a credit card:

Example 1

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

If you close Card B, your credit utilization remains low, and the impact on your credit age is minimal. However, closing Card A raises your utilization from 13% to 20% and shortens your credit history, potentially hurting your score.

Example 2

You’re planning to apply for a mortgage💡 Definition:A mortgage is a loan to buy property, enabling homeownership with manageable payments over time. soon. Keeping old cards open helps maintain a strong score, crucial for securing better mortgage rates. Conversely, if a card charging a $95 annual fee offers no value, closing it might save money at the cost of a slight score dip.

Common Mistakes and Considerations

• Closing a Card with a Balance: This increases your utilization ratio significantly, which could harm your score more than closing a zero-balance card.
• Credit Mix: Closing your only credit card reduces your credit mix, which makes up about 10% of your score.
• Future Credit Needs: If you plan on applying for significant credit soon, like a mortgage or car loan, maintaining a high score is crucial.

Bottom Line

For most people, the best strategy is to keep old credit cards open, particularly those with no annual fee and a long history, to maintain a higher credit score. Only consider closing a card if the costs or risks outweigh the benefits, and always account for the impact on your credit utilization and account age. If you decide to close a card, ensure you can manage other balances to keep your utilization below 30%, ideally below 10%.

By understanding these dynamics, you can make informed decisions about your credit cards that align with your financial goals and maintain your credit health.