Say you got a credit card five years ago and you used it a lot during the first couple of years. But you haven’t used it since then and are thinking of closing the account. Should you do it?
You might think that by closing an account, you’re simplifying your life and improving your credit score. You may be right about the first part, but closing a credit card account, especially if it’s an older one, will actually harm your credit score in two ways:
It reduces your available credit, which pushes up your credit utilization ratio. This is a fancy way of saying that you are using too much of your available credit. Your credit utilization ratio accounts for 30% of your credit score. Because this is so important to your score, many experts recommend keeping your balances below 30% of your available credit. For example, if all of your credit limits add up to $10,000, you wouldn’t want a total balance of more than $3,000. But I recommend keeping your ratio at 20% or below to give yourself some breathing room.
It also reduces the average age of your accounts. This makes up a smaller, but still significant portion of your credit score. If you close a recently-opened card it won’t harm your score much. The bad news comes when you close an older account — this can reduce your average age of accounts considerably. Creditors like to see accounts that have been open a long time with a solid payment history. So if you close your oldest account you eliminate a portion of your oldest account activity.
The exception to this rule is a card that carries an annual fee. Especially if you don’t use the card regularly or get rewards from it, it may make sense to close it to avoid paying the fee. Before you do this though, apply and be approved for a second major credit card. You always want to have at least two major credit card accounts open.
A final tip: Use each of your credit cards at least twice a year. Even a $1 pack of gum every 6 months will do the trick. This keeps them active in your credit mix and helps your overall credit score.