Mary writes: Since turning 18 (I’m now 26), I have already amassed nine different credit cards with a combined credit limit of around $30,000. I’m paying down a combined credit card debt on four of these cards of about $20,000. I’d like to close out accounts I’m not using and as I pay them off, but I heard it will affect my credit report and score. What do I do?
Congrats on making progress towards your credit card debt. What you have read is correct: Closing credit card accounts may not look great on your credit report, and lower your credit scores. This happens for two reasons.
First, the longer you have had credit accounts open, the higher your credit score will go. If you close an account you got when you turned 18, it will take a chunk out of your score.
Second, part of your credit score is based upon what bankers call your utilization ratio. That’s the ratio of your current balance to your total combined credit limits. Right now, yours is a fairly high 66%, so it’s likely lowering your credit score. Close credit card accounts before paying down your balance, however, your utilization ratio will go up, and your credit score will drop.
Knowing this, there are ways to go about closing accounts that will minimize any negative impact on your credit report. And this isn’t necessarily a bad thing to do. After all, these dips in your credit score will be temporary, and whenever a real person reads your credit report, having five or fewer credit cards looks better than having nine.
Look for accounts that have been open the shortest amount of time and close those first. Avoid closing your first one or two credit cards, even if you don’t use them. Next, close credit card accounts with the smallest credit limits. (Store charge cards and credit accounts are good candidates for this).
Finally, don’t close accounts on which you still carry a balance if you can help it. You’ll always have more leverage with your credit card (to negotiate lower interest rates, for example), if they think you will continue to make charges on the account.
A final note about closing credit card accounts: About one or two months after you close an account, check your credit report to ensure the card company reported the account as “closed at account holder’s request”. If your report reflects that the account was closed by your bank, it won’t look great to future prospective lenders on your report.