Keeping your credit score high isn’t as simple as paying your bills on time (though that helps!). There are many other factors to consider. I was always under the assumption that you want to close old credit cards that have no value to you.
Check out our credit card calculator.
As a teenager and twenty-something, I had a card for every store I shopped at – Neiman Marcus, Victoria’s Secret, Macy’s, as well as a couple Mastercard’s and Visa’s. When I finally gave up my shopping habits and decided to close all of these cards for good, I had no idea that it would negatively impact my credit score.
So how do we know when to close a card and when to keep it open? It has a lot to do with the total amount of credit you have available to you and how much of that total is already being used– your debt utilization ratio.
How Debt Utilization Works
If you have three credit cards with limits of $10,000 each, you have $30,000 in possible credit. Let’s say you have a balance of $3,000 on one of those cards and nothing else on the others. If you leave all of the credit open you are only using 10% of your total credit, this is your debt utilization ration. If you close the unused cards and only keep open the one you have a balance on, you are using $3,000 of your $10,000 total limit which is a 30% debt utilization ratio. You still carry the same amount of debt, but one is much better for your credit score than the other. Having lower debt utilization ratio is an important factor in keeping your credit score high.
Don’t Lower Your Limit
If you are afraid that having a large amount of credit open to you is tempting for a no holds barred shopping spree, don’t get nervous and close all your cards. Put them in a safety deposit box or in a place where you can’t easily get to them. Some people don’t have an issue with self-control when it comes to credit cards. However, for anyone who has worked hard to pay off debts from foolish spending, you realize that is a slippery slope. Keep those cards out of sight and out of mind. Don’t be tempted to lower the limits either, because you will be eating into your debt utilization ratio as well.
Hold On To Old Cards
Cancelling an older card could actually be more damaging to your credit score than you think. If you decided that you must close some accounts, look for a newer account that you may not use.
What if They Cancel You?
Have you ever gotten notice in the past that a creditor has closed your credit line because they went out of business or were bought out? It may slightly impact your credit score because it will drop your debt utilization ratio. If a store closes and your card closes with it, there isn’t anything you can do about the situation. If you are in danger of your card being closed due to inactivity, you could make one small charge every few months and pay it off in full.
Can you ever close out that old credit card? The ding to your credit score is likely to be short lived especially if you carry no balance on all of your cards. If you have balances, it’s best to leave them open to increase your debt utilization ratio. Once you pay them off, you can then revisit.
It’s recommended that if you are applying for a large loan in the very near future, like a mortgage, you shouldn’t close those cards. If a big purchase is a year or more in the future, it may be okay to close your newer cards. It’s not that you can never close your credit cards, just be smart about which ones you choose to close and when.
Related Article: The Five Fastest Ways to Improve Your Credit Score
Photo Credit: reallyboring