If you have an old credit card that you no longer use, you might think that it would make sense to close the account. Under some circumstances, that can actually backfire and hurt your credit score.
Factors That Impact Your Credit Score
Credit scores are based on several factors. Algorithms analyze an individual’s history to figure out how likely that person is to fail to repay debts or to make payments late.
If you close a credit card account, it can increase your credit utilization ratio, which is calculated by dividing your total credit card balances by the sum of your credit limits. Closing an account will lower your total available credit and will therefore raise your utilization ratio.
If you close an account with a high credit limit, you may see a spike in your credit utilization ratio even if your total amount of debt remains steady. A higher credit utilization ratio can make you risky in the eyes of lenders and may make it difficult for you to qualify for a loan.
The length of your credit history is one of the main components that determines your credit score. It accounts for 15 percent of your FICO credit score. Your credit score may fall right after you close an old account, but it may go back up after a few months if you pay your other bills on time.
If you close an account in good standing, it will be removed from your credit reports after 10 years. If you close an account with a history of late payments, it will be removed from your credit report after seven years. Closed accounts will continue to be factored into your credit score until they’re removed from your credit report.
How to Decide Whether to Close an Account
Accounts that have been open for several years and that have low balances and high credit limits can help your credit score. It’s generally a good idea to keep them open, especially if you don’t have a large number of credit cards.
It may make sense to cancel a credit card that you rarely or never use and that charges an annual fee. Before you do so, call the card issuer and ask if the company will reduce or waive the fee to keep you as a customer.
It may be a good idea to close a card with a high interest rate if you carry a balance to help you stop accumulating debt.
Don’t close an old credit card account if you plan to apply for a mortgage, a car loan or another type of loan in the near future. If you want to close several accounts, don’t do it all at once because that can have a significant negative impact on your credit score. Close them gradually and see how much closing each account affects your credit score. Since a long credit history can help your score, you should keep at least one older account open.
