Bad Credit Repair: When to Close a Credit Card and When to Keep It Open
May 17, 2018 | By Opploans
Closing a credit card will negatively impact your score, but not for the reason you think.
Your credit score is very important. This three-digit number compiled by the three major credit bureaus determines what kind of loans and other credit cards you’ll be able to qualify for and at what rates.
Simply put, your credit score determines your financial future.
How does a credit score work, anyway?
If your score is in the high 700s or above, you’ll have a good shot at getting whatever kinds of loan you might need. But if that score is under 700, your prospects will look gradually worse and worse the lower it gets.
If your score is too low, you might not be able to find any loan at all, other than a bad credit loan. And while some bad credit loans can be useful financial tools, many of them are quite risky. For instance, you could end up with a no credit check loan with super high rates and super short payment terms–you might even have to put up your car as collateral.
Clearly, you’ll be much better off with a higher credit score, but if you’re starting with a low score or even no score at all, it can be really intimidating to build up good credit. One of the most important steps is paying down your debts and paying all of your bills on-time going forward.
But there’s often some confusion when it comes to credit cards. If less debt is good, wouldn’t the best possible option be paying off your remaining credit card balances and then closing them so you won’t be able to acquire any further credit card debt?
Closing a credit card won’t lower the age of your credit.
While you might be worried about hurting your credit score through credit card misuse, proper credit card use is one of the most effective ways to build up your score. And that’s not all. If you aren’t careful, you can actually harm your credit score by closing a credit card.
“Closing credit cards is typically a bad idea for your credit scores, but not for the reason a lot of people believe,” advised Michelle Black (@MichelleLBlack) credit expert and president at www.HOPE4USA.com. “One of the factors which FICO considers when calculating your credit scores is the average age of the accounts on your credit reports—the older the better.”
“Some people believe that when you close an account, such as a credit card, you lose credit for the age of that account when your average age of accounts is calculated. However, that is not true. Closed credit card accounts remain on your credit for generally seven to 10 years (seven years for negative accounts, 10 years for positive accounts). As long as the account remains on your credit reports, the age of the account will continue to be considered by credit scoring models.
Closing credit cards will hurt your credit utilization ratio.
“The real reason why closing a credit card account often damages credit scores is because closing an account, especially one which is paid off, can trigger an increase in your aggregate revolving utilization ratio. Credit scoring models take a look at how much total credit card debt you owe versus your total credit limits on open accounts. When you close an account your overall or aggregate credit card limit is lowered, often resulting in lower credit scores.”
Katie Ross, Education and Development Manager at the American Consumer Credit Counseling, or ACCC (@TalkCentsBlog), reiterated the warning against closing credit cards recklessly while also advising how best to properly close them:
“Closing your credit cards, especially closing multiple cards at once, will hurt your credit score, credit utilization, and length of credit history. Only close your card if you can’t control your spending and need to remove the temptation. However, if you plan on closing cards, you should fulfill your debt obligation so that it doesn’t report as closed, but with a balance. If you decide to close multiple cards, gradually doing so every six months will help limit the damage to your score, rather than closing multiple cards at once.”
So closing credit cards isn’t an inherently good way to improve your credit, and can even cause it greater harm.
If you’re going to close a credit card, which one should you close?
This doesn’t mean that you should never ever close a credit card. But how do you know which to close and which to leave open?
Thankfully, Ross gave us the rundown on which cards you should close:
“The card you don’t use with an annual fee. A card with an annual fee that you aren’t using will just cost you money.”
“A newer card you don’t use; it won’t help you establish credit history.”
“Make sure closing one card doesn’t impact your score by paying off balances on all other cards. If you have zero balances, your credit utilization rate will be zero, and won’t be impacted by the loss of a balance.”
And which cards does Ross advise leaving open?
“Keep your oldest credit card open. A longer, positive credit history is beneficial to your score.”
“Don’t close a card with a high credit limit, especially if you have high balances on other cards or loans. Closing a card with a higher limit will negatively impact your credit utilization ratio, making it seem like your ratio is spiking.”
“If you do close a card, request a credit increase on another existing card to maintain a strong ratio.”
Old cards are better than new cards, and secured cards can also help rebuild your credit.
Another expert we spoke to echoed Ross’s advice about leaving open cards you’ve had for a while and offered some tips about trying out new cards:
“Keep the credit cards you use and the cards you have held for a long time,” Janice Lintz (@JaniceLintz), writer and CEO of Hearing Access & Innovations, told us. “A card that you have held for an extended time boosts your score. I was shortsighted and closed a card I held which was an error. But I will not shut a card I have held for 32 years since it boosts my score dramatically.
“I regularly try and close cards that don’t work for me. Some cards I don’t think I will like and do and vice versa. I ‘date’ my credit cards to see if we can be in a long-term relationship. 🙂 My score is in the high sevens to eights.”
But what if you don’t have a credit score or any credit cards? Or you lost your credit cards for some reason?
“After bankruptcy, all the credit card companies cancel the credit cards, so I tell my clients to open a secure credit card to start building a credit history and to improve their credit ratings,” explained attorney Arnold Hernandez.
Hopefully, this has all helped you get a better understanding of how closing your credit cards can impact your credit. Now go forth, and may your credit be stronger than ever!