Why You Should NOT Close That Old Credit Card
Even if you’re closing it and replacing it with a new card, think again!
Your credit score might seem simple, but it’s not. And while basic “good money” habits will get you very far—stuff like paying your bills on-time and not maxing out your credit cards—there are other tricks to a good score that aren’t so obvious.
While it might seem like closing an old credit card is a good way to maintain good credit, it could actually have the opposite effect. Closing that card could actually hurt your score, not help it.
The 5 parts that make up your credit score.
Before we get into the specifics, let’s cover how your credit score is calculated. And when we say “credit score,” we are talking specifically about your score from FICO.
While the specific algorithms that are used to create your FICO score are unknown, we do know that credit scores are made from five different categories of info, some of which are more important than others.
The five categories are:
1. Payment History: This makes up 35 percent of your score, more than any other single category. It measures your history of paying your bills in full and on-time. If you have a bad credit score, odds are that your payment history is at least partially to blame. When a lender or a landlord is looking to do business with you, seeing that you keep up with your bills is key.
2. Amounts Owed: This is the second most important category, making up 30 percent of your score. The category is pretty straightforward: It measures how much money you currently owe. It calculates your credit card balances, as well as any outstanding loans you have, including personal loans, mortgage and auto loans, student loans, and certain bad credit loans. The only kinds of loans that won’t be included are no credit check loans—stuff like payday loans and title loans.
3. Length of Credit History: This category makes up 15 percent of your score, and it measures how long you’ve been using credit. The longer you’ve been responsibly using loans and credit cards, the better. It also takes into account the average age of your open accounts. Lenders not only like to see a long history of credit use, they also want to see longstanding relationships with other lenders and credit card companies.
4. Credit Mix: This category makes up 10 percent of your score. It takes into account the different kinds of credit you’re using. This means credit cards versus personal loans versus home and auto loans versus student loans, etc. If the only type of borrowing you do comes from credit cards, for instance, that will ding your score. Lenders like to see a diverse credit mix.
5. New Credit Inquiries: This category also makes up 10 percent of your score, and it reflects the number of times that you have recently applied for more credit. Any time you apply for credit from a traditional lender, they will run a “hard” check on your credit. These checks are noted in your report, and too many within a short time frame can negatively impact your score—though not by much. Too many recent inquiries signal that you might be desperate for new credit, a sign that you aren’t handling your finances responsibly.
Got all that? Great. When it comes to closing your old credit card, the two categories that it can negatively affect are your amounts owed and the length of your credit history.
Closing a credit card will hurt your credit utilization ratio.
There is a second part to the “amounts owed” part of your score that we did not touch on in the above section. It’s called your “credit utilization ratio” and it relates specifically to your credit cards. It’s also a crucial element to your overall score.
Credit utilization ratio measures how much of your total credit limit is being used. For example, let’s say that you have two credit cards: Card A has a $3,000 limit and Card B has a $7,000 limit. That means, between the two cards, you have a total credit limit of $10,000
Now let’s say that you had spent $2,000 on Card A and $4,0000 on the Card B. This would mean you have spent a total of $6,000 against your $10,000 limit. Your credit utilization ratio would be 60 percent.
In an ideal world, you are paying off your credit card balances in full every month. But many people carry balances on their cards from month to month, paying them down a little bit at a time.
If you’re carrying outstanding balances on your cards, try not to let your credit utilization rise above 30 percent. That’s the range where your score will really start to suffer.
And here’s where closing that old card comes into play: Your credit utilization ratio is just as much about your total credit limit as it is your balances. If you have an old card that you are no longer using, that unused credit limit is improving your ratio.
Back to Card A and Card B. What if you got a $2,000 tax return and used it to pay off Card A? Your credit utilization ratio would now stand at 40 percent—still high, but way better than 60 percent. But if you closed the card, your ratio would balloon to 57 percent. That’s almost as high as when you started!
Old accounts help your score more than new accounts.
There’s another way that closing that old card will hurt your credit score, and it’s by lowering the average age of your accounts.
Lenders not only like to see that you’ve been using credit (responsibly) for a long time; they also like to see that you have been using the same accounts for a long time. It shows them that another lender has been able to maintain a long-term financial relationship with you as their customer.
So even if you closed out that old card in favor of a new one with better rewards and a lower interest rate, it would still ding your score. Keeping that old card open will allow it to stay on your credit report (as an open account), which will, in turn, be reflected in your score.
Of course, the trouble with keeping an old card open is that you might be tempted to use it. And if you’ve recently spent a lot of time paying down excessive credit card debt, taking on new debt beyond what you can immediately pay off is a recipe for financial disaster.
So instead, you should cut up the physical card. At the very least you should lock it away in a safe. Do whatever it takes to make sure that your old card can stay open and benefit your credit score without you using it to take on additional, unnecessary debt.
To learn more about your credit score, check out these related posts and articles from OppLoans:
- Can You Have Bad Credit Even With a Good Income?
- Are Balance Transfers a Good Way to Pay Down Debt?
- How Do You Contest Errors On Your Credit Report?
The information contained herein is provided for free and is to be used for educational and informational purposes only. We are not a credit repair organization as defined under federal or state law and we do not provide "credit repair" services or advice or assistance regarding "rebuilding" or "improving" your credit. Articles provided in connection with this blog are general in nature, provided for informational purposes only and are not a substitute for individualized professional advice. We make no representation that we will improve or attempt to improve your credit record, history, or rating through the use of the resources provided through the OppLoans blog.