Closing Your Credit Cards Can Hurt Your FICO Score

3 Credit Cards Image by Petr KratochvilIn recent months, the subject of “too many credit cards” has frequently arisen on blogs and forums. I have even seen a post title saying that closing a credit card will immediately boost your credit score by 10 points. I don’t know if this is true; a quick search on Google didn’t turn up any substantiating information.

I had always believed that if my accounts all showed up in “Excellent” standing on my credit report, that it would be a positive thing, and therefore kept old and unused accounts open. Now I am glad I haven’t acted hastily.

First of all, I currently have 4 credit cards (shared with my sister):

  1. Old Navy Store Card
    Opened 2001, the earliest/oldest account on my credit history, never used
  2. Bank of America Platinum Visa
    Opened 2004, unused since June 2006
  3. American Express Blue Cash
    Opened 2006, primary card
  4. Amazon Visa
    Opened 2008, used on Amazon.com where we do the bulk of our online shopping and wherever Amex isn’t accepted

I had seriously considered closing my Old Navy store card recently and also contemplated the Bank of America Visa, which I had been keeping around for emergencies. But, last night I happened on article at Bankrate.com “Closing credit card dings credit score” by Leslie McFadden, which tells us that there is actually no harm in keeping old and unused credit cards open, and that it could actually harm your future credit history to close them, and am really glad that I saw this article before I had done anything.

Before we start, here is a breakdown of the components of a credit score and how it is calculated.

FICO® Score Breakdown

  • Payment History – 35%
    Types of accounts (credit card, mortgage, etc.), accounts paid as agreed, number of past due accounts, etc.
  • Amounts Owed – 30%
    Balances of current loans, debt to credit ratio, proportion of installments still owing, etc.
  • Length of Credit History – 15%
    Time since accounts opened, last activity, etc.
  • New Credit – 10%
    Recent inquiries, new accounts, etc.
  • Types of Credit Used – 10%
    Mortgages, Credit, Retail, etc.

Reasons Not To Close Credit Cards (from a scoring perspective):

  • Contrary to popular belief, FICO does not penalize you for having “too much” available credit.
  • Once you close an account, the credit bureaus will only keep it in your credit history for 10 years. After 10 years all that “good” credit history will be gone.
  • A creditor may choose to delete your records prior to 10 years, erasing your “good” credit history even sooner.
  • It is better to have 20 years of history for an old account in good standing, than to have fewer and newer open accounts, because length of history accounts for 15% of your credit score.

Reason to Close Credit Cards

While it doesn’t really hurt to keep multiple accounts open, if you have so many cards that you have a hard time controlling your spending or keeping track of payment due dates, then it would be a good idea to close some accounts.

Here are a couple of factors to consider and figure into your decisions when closing credit card accounts.

Debt-to-Credit Ratio

Debt-to-credit ratio is the ratio of how much you owe compared to how much credit limit you have. For example, if you have a credit card with a $5,000 credit limit and your current balance is $1,000, your debt-to-credit ratio is 20%. Lenders look at your debt-to-credit ratio to determine your financial stability and the risks of lending to you.

Recommended debt-to-credit ratios:

  • On any given account, it is suggested that you not exceed 50% of your credit limit for that card.
  • Total debt-to-credit ratio for all accounts (combined credit limits), debt not to exceed 30% of total limit (this means if you have a total of $10,000 credit limit from all your credit cards, you should have at least $7,000 of available credit – not charged).

Example of how closing an account (changing your debt-to-credit ratio) can hurt your credit

  1. You have 2 credit cards
    1. Card A has a credit limit of $7,500
    2. Card B has a credit limit of $2,500
  2. You are carrying a balance of $5,000 on Card A, but no balance on Card B
  3. Your current debt-to-credit ratio is 50%
  4. You close Card B, lowering your total credit limit to $7,500
  5. Your debt-to-credit ratio is now 67%, exceeding the recommended ratio

Store Cards vs. Bank Cards

Bank cards have more impact on your credit score, and if you must close some cards and it came down to choosing which one(s) to close, you’d most likely be better off closing the store cards.

BUT - If your store card was your first credit card and the account with the oldest history, which for many people it is, you need to consider the following:

If your first account was a store card opened many years ago, and your only other bank issued cards are newly opened, closing your store card will have some negative impact.

How to Decide Which Credit Cards to Close

When trying to decide which cards you should close, you should consider the following:

  • If you are carrying a balance, how much available credit do you need in order to not exceed the recommended total debt-to-credit ratio of 30%?
  • If you do not carry a balance, how much is your average monthly balance and how much available credit do you need in order for your average balance to not exceed the recommended 30% each month?

When you have figured out how much available credit (what makes 70%) or credit limit (100%) you need in order not to exceed the recommended 30%, take a look at the limits of each card and figure out which ones would allow you to keep your 100% at the necessary rate.

And if you have store cards:

  • Which store cards are newest and therefore of smallest consequence and impact to your credit history.
  • If your longest credit history is from a store card, keeping it open might benefit you more than closing it.

Conclusion

I am greatly relieved that I saw that article by Lesile McFadden when I did. Had I not seen it and gone ahead and closed my Old Navy store card, my oldest and very first account, I would have truncated my credit history by at least 3 years because I did not get my Bank of America Visa until 2004. And if I had also closed my Bank of America account, (after the bank purges my records) my credit history would only begin from 2005, when I obtained a mortgage.

Credit cards are a very good and easy way to build or re-build credit history, provided that they are used responsibly. If you have older cards that you don’t use, as long as you are not charged an annual fee for them, I don’t see any harm in keeping them open to maintain that good credit history and also as backup for an emergency (ATM or Debit card failure, travel or medical emergencies, etc.).

For more information on the benefits of using credit cards, please refer to a previous post: Credit Cards Really Aren’t So Bad

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Allow me to remind you at this time that I am not a financial expert and that all information is based on personal experience and research for personal purposes. It is offered here to supplement your own research and not to be taken as professional financial advice. It is recommended that you consult other sources and/or a finance professional before making important financial decisions. ()

Sources referenced in this post and recommended further reading:

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2 thoughts on “Closing Your Credit Cards Can Hurt Your FICO Score”

  1. Thanks so much for posting this. So many people have no idea how important a good credit history is! My co-worker mentioned a great idea the other day. I told her I was annoyed that my first credit card was a student credit card, and the APR was so high I have no reason to use it, but that I can’t really close it without losing a decent amount of credit history (I didn’t get my next credit card for a few months to a year later). She told me I should just cut up the card. That way I am not tempted to ever use it, but that account is still technically open and contributing to a lesser credit to debt ratio. Another option, if you want to still have it available for an emergency in the future, is to freeze it in a chunk of ice in your freezer. That way you can still get to the card, but it will take some effort and determination :)

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