How to Handle Old Credit Card Accounts
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Ready to close down old credit cards you don’t use regularly? Not so fast. Many consumers think closing older or unused cards will look good to credit bureaus and reflect positively on their credit score. After all, you’re not relying on credit or spending more than you make.
But closing old cards may not be a great idea, according to the Consumer Financial Protection Bureau (CFPB) and the Fair Isaac Corp. (FICO), the data analytics company behind the FICO credit score, a widely used measure of consumer credit risk.
In fact, FICO stated: “We never recommend closing a credit card for the sole purpose of raising your FICO Score.” Here why you may want to keep your old cards open.
Why you should keep old credit card accounts open
Closing older cards can impact your credit utilization ratio. “Credit utilization ratio” sounds complicated. But this term describes how much of your available credit (through credit cards, a home equity line of credit and other loans) you’re using right now. Using 30% or less of available credit reflects well in your FICO Score.
To figure out your credit utilization rate, divide your total balances by the total amount of credit available on all your cards and loans.
Here’s an example: Lisa has four credit cards that provide $15,000 in credit each. She has $60,000 of available credit, of which she’s using $10,000. According to the FICO formula (10,000/60,000), Lisa is using 16.7% of her available credit.
Amy has two credit cards, with a total of $30,000 of available credit. She owes $10,000 on one card and $10,000 on another. Amy is using 66.7% of her available credit.
Lisa’s credit utilization ratio is much lower than Amy’s, and she has more credit available to her. But if Lisa closes two of her cards that provide $30,000 in credit, she will have a 33.3% credit utilization rate. She may appear to be a riskier person to lend to.
Closing a card impacts your credit history. The history of your credit accounts makes up 15% of your FICO Score. The score integrates how long your accounts have been open, including the age of your oldest account. So that credit card you opened 15 years ago may well be helping to boost your credit score by increasing your average age of accounts.
You may just need an upgrade. If it’s a card you truly detest due to high fees or other factors, consider transitioning to a new card. For example, if you’ve outgrown your student credit card, you can talk to your issuer about transitioning to another type of credit card. Changing your card but keeping your issuer means you don’t lose credit for all your years of timely payments, and your history with that issuer.
If you don’t like the fees or interest rates, ask your issuer about other options. If you started out as a new-to-credit user at a higher risk level, you may be able to convert to a more traditional card for prime cardholders, said Thomas Nitzsche, a former credit counselor and spokesperson with Money Management International. “If you don’t ask, the answer is always no.”
In the future, it may be more difficult for you to open a credit card. Credit cards may become more challenging to acquire, have lower limits or require higher income. Opening new accounts can also negatively impact your credit history. Keeping your card on hand may be one way to improve your credit score — and can help you avoid opening new accounts except when absolutely necessary.
Closing old cards isn’t an easy fix for current credit troubles. If you’re having problems with debt, card disputes or other money-management difficulties, consider speaking with a credit counseling bureau. Credit repair companies are another option. These fee-based services may be attractive to those who don’t have time to challenge errors with credit bureaus, and will negotiate with debt collectors or creditors on your behalf.
Lines of credit may be necessary in emergencies. If you need quick access to cash to pay bills, are in a volatile job industry, are paid on commission or have uneven income, having several readily accessible lines of credit with high limits might be helpful, Nitzsche said.
You may be missing out on benefits. Some cards come with free credit monitoring, a well-reviewed app, car-rental insurance or cool extras, such as free museum weekends or cash back at favorite stores. “Cards often offer all these benefits, but issuers rely on consumers reading up on the benefits, so most people don’t use them,” Nitzsche said.
When it’s OK to close your old credit card accounts
Over 25% of open credit card accounts in America are classified as “dormant,” or unused, according to a recent report published by the American Bankers Association (ABA). In other words, a cardholder has the plastic but keeps it in his wallet (or a closet at home).
If you’re tempted to spend more than you make or have had issues with credit-card debt in the past, closing some credit cards might be a wise move. Some of Nitzsche’s most indebted clients have six-figure credit card debt and 20-30 cards.
If you have a strong credit history that reflects on-time payments and responsible money management, closing one account may not impact your score much. You may want to get rid of one card with a lower limit to minimize the impact on your credit utilization ratio, or a newer credit card account you just didn’t love.
Of course, if you stop using your credit card altogether, your issuer may close your account, Nitzsche said. There’s no standard for when this may happen, he noted — closure depends on the issuer.
And know that you are responsible for paying off any remaining balance, with interest, even if you closed your account in writing.
Deciding whether or not to close your old credit card
U.S. cardholders have fewer credit cards than before the recession, according to the Consumer Financial Protection Bureau’s 2017 report on the state of the credit card market, a biennial report. The report points out that cardholders with “prime scores or better” (defined as those with scores above 660) held more than five cards before the recession, but hold one less now — an average of four cards.
In fact, as a share of disposable income, outstanding credit for most Americans is at around 5% — “well below recession-era levels and has seen little growth over the past six years,” according to the ABA report.
If you’re one of the many Americans responsibly managing debt, consider keeping the card and checking your credit score for free.
One strategy for older credit card accounts is to use them once or twice a year for a small purchase. This will keep the account open, maintaining both your credit history and the available credit line to help your utilization rate. Just make sure you make payments on time.
But if it’s going to be hard to resist the temptation to use the card regularly, “put the card on ice, in the freezer, if that’s what you have to do,” Nitzsche said. “Even if you had it for a while, and owed a lot of money, don’t shoot yourself in the foot. Think it through. Even if you need to cut it up to get satisfaction, don’t just call and close.”