One of the most common questions I receive via my contact form is: “Can I close old, unused credit card accounts without hurting my credit score?” Most often, the answer is no. Here’s why.
The majority (an estimated 65%) of your FICO score and your other credit scores (you actually have multiple credit scores—one for each credit bureau), is based upon two things: Your payment history and your utilization.
It’s easy to understand how payment history affects your FICO score. Pay on time; your score goes up. Pay late; your score will sink faster than the Titanic. Understanding debt utilization is trickier, and it’s where keeping old credit card accounts open as long as possible comes in.
Your Debt Utilization Ratio
Your debt utilization ratio is figured by dividing how much debt you have by how much total credit you have (i.e., the credit limits on your cards.) The lower, the better.
If you have no debt and several credit cards open, your utilization ratio is 0%. Have $10k in credit card limits and $9k in a combined balance? Your utilization is 90%. Sometimes, you can even have a utilization score of more than 100%, which will dramatically lower your FICO score. This can happen if:
- You close a credit card account that still has a balance
- Your credit card does not report your credit limit to credit bureaus (some don’t!)
Why You Want to Keep Old Accounts Open
Even if you don’t use an old credit card account, it can help your credit score by adding to your combined credit limit and, therefore, lowering your utilization score.
If you have just two credit cards open with a combined $5k credit limit and have a combined balance of $2,500, you have a 50% utilization ratio, and your FICO score may be suffering for it. If, however, you have two more credit cards with a $2,000 combined balance, you are using only $2,500 of $7k available and have a debt utilization ratio of 36% (better than 50%). Closing those old credit card accounts will certainly cause your FICO score to drop. (As a rule of thumb, try never to exceed 35% utilization. Keeping it under 20% is better, and under 10% even better).
A Final Note About Closing Old Accounts
There’s one final reason that closing old, unused credit card accounts may hurt your FICO score: The longer an account has been open, the more it helps your credit score (even if you’re not currently using it). Closing the oldest credit card account you have on record can reduce the length of your credit history, further hurting your score.
It’s your call: If the idea of open but unused credit card accounts really bothers you, then by all means close them. It’s silly to be a slave to your credit score, and if you continue a patter of long-term responsible credit use, your score is bound to soar to new heights. That said, if you are trying to get your score in the best possible shape in the near-term, it is better to keep those old accounts open.