Closing Credit Cards Could Hurt Your Credit Score
You may be thinking that closing credit cards is a great idea: It will reduce the temptation of using them and “simplify” your life. And it will make you a lower credit risk if you have fewer cards, right? Well, before you take the plunge and cancel credit accounts you’ve had for a while, think twice — your credit score is what will take the plunge!
One of the most common misconceptions about personal credit is that closing credit cards, particularly accounts you don’t use, is a good idea. If you close an “established” account, especially if it has been a satisfactory (always paid) account for over two years, it will lower your credit scores. Why does this happen? The reason is that 15% of your credit score is computed from the “length of credit history,” which is the time since accounts were opened and the time since account activity. Hence, people with credit accounts in good standing for a long time typically have the highest credit scores.
If you close a seasoned credit account, you lose the ranking and value this account had in the calculation of your credit score. How much could it go down? Well, that depends. However, because the FICO credit score range is 550 points (300-850), the most it could reduce your score should be 82 points (15% of 550). That is a huge hit to take and would almost certainly bring your credit rating down so far that you would pay higher interest rates on any new accounts you open. If your credit issuer applies “universal default,” you could even find yourself paying a higher interest rate on existing accounts that are in good standing!
The only valid reason to close an unused account is risk: Either you’re worried about someone stealing the numbers and committing fraud, or you fear you’ll overspend if you have the card available. Well, your fraud protections on credit cards are actually quite good, as long as you check your statement and report acts of fraud quickly. As far as overspending goes, that’s a personal choice — just be aware of the negative impact of closing accounts.
The bottom line is, you want to avoid closing out older credit card accounts, since your credit score will go down.
Tags: close credit card account, get rid of credit card
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Reader Comments
Very informative article. Thanks!
August 28, 2008 1:19 pmThanks for sharing! I’ve always been on a mission to close as many credit cards as possible because I really am not comfortable with the temptation multiple credit cards bring. I think what I will do is just stash them away in a drawer and forget about them instead of closing them all out.
October 9, 2008 2:58 pm[...] are many informative videos and podcasts and I particularly liked this article on reasons NOT to close out your unused credit cards . I didn’t know closing your credit cards could actually hurt your credit rating. With my [...]
October 9, 2008 4:09 pm[...] are many informative videos and podcasts and I particularly liked this article on reasons NOT to close out your unused credit cards . I didn’t know closing your credit cards could actually hurt your credit rating. With my [...]
October 13, 2008 12:02 pm[...] are many informative videos and podcasts and I particularly liked this article on reasons NOT to close out your unused credit cards . I didn’t know closing your credit cards could actually hurt your credit rating. With my [...]
February 25, 2009 9:57 pm