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How and When to Cancel a Credit Card
Tuesday, 16th September 2008 (by J.D.)This article is about Basics, Credit Cards, Hints and Tips, Money Hacks
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Update: After feedback from readers, I’ve made some clarifications to this post. My recommendations have not changed, but I’ve tried to emphasize the effect closing a credit card can have on your credit score.
My recent two-part series on responsible credit card use (Five essential credit card skills and How to choose a credit card) prompted several readers to ask the same question: What’s the best way to cancel credit cards in order to minimize the impact on your credit score? I spent an afternoon doing some research — here’s what I learned.
Anatomy of a credit score
If you use credit in the United States, you have a credit score. You rent an apartment, buy a house and a car, pay utility bills, and sign up for credit cards. As you spend, banks and landlords and other agencies report your habits to credit bureaus, organizations that collect this information in centralized databases. This data is then converted into credit reports and, ultimately, into a credit score.
Your credit score is a single number that measures your creditworthiness, and determines the types of credit you can obtain, and how much this credit will cost you. In general, your credit score is based on the following:
According to Fair Isaac, the company behind credit scores, these factors are accurate predictors of future credit performance. That is, these are the things that best indicate how great a credit risk you are. (For some people — such as young adults who don’t have a lengthy credit history — the importance of each category may be somewhat different.)
For more detailed information about the components of your credit score, check out myFICO.
Pros and cons of canceling a credit card
On the surface, closing an unused credit card account seems like a no-brainer. It’s not. Closing a credit card account may actually hurt your credit score on two levels.
- The longer you’ve had an account, the more weight it carries. That’s part of the “length of credit history” slice in the pie chart above.
- The “amounts owed” slice represents the balance and burden of your credit, how much of your available credit you use. Say you have two cards, both with $5,000 limits. You’re carrying a $2,000 balance on one of the cards, or about 20% of your total available credit. If you close the unused card, you’ll then be using 40% of your available credit, and your “utilization ratio” will jump, giving a temporary ding to your credit score.
After speaking with the consumer affairs manager from Fair Isaac, Bankrate concluded:
If your credit card balance is zero, go ahead and close as many unused accounts as you want. As long as your credit cards are balance-free, it won’t hurt your credit score a bit. So call those card issuers and cut away.
If you’re in credit trouble or if you had credit problems in the past and you know an open credit line is just going to temp you to spend — go ahead and close the account. Yes, it might ding your credit score a bit. But if it will keep you from acquiring more debt, it’s best to do it.
This quote from Bankrate is a little misleading. While it’s true that keeping credit cards balance-free will prevent your credit score from being hurt if you close an account, the only way to keep the cards balance-free is not to use them. Even if you pay off your cards every month, the issuers still report a balance to the credit agency. As a result, canceling an account can drop your credit score. (And I’m under the impression it can never raise it.)
There are several arguments for closing your unused credit card accounts, however. Doing so:
- Reduces the risk of identity theft.
- Reduces your bookkeeping.
- Prevents you from abusing them.
- Puts you in control of your finances. (Don’t underestimate the power of this.)
Whether these factors outweigh the potential damage to your credit score is for you to decide. When I was struggling with debt, I canceled my accounts, and I’m glad I did. It gave me time to learn about money without the temptation to spend. Now that I can manage my finances responsibly, I’ve obtained one card. My FICO score is 814.
There’s at least one situation in which you should keep your accounts open, though. If you intend to take out a major loan in the next year (like an auto loan or a mortgage), do not cancel your accounts. Doing so will ding your credit score, if you’re carrying a balance. Instead, freeze your credit cards in a block of ice, or place them in a safe deposit box.
How to cancel a credit card
Closing a credit card account is easy, but if you decide to do it, you should do it correctly.
If you plan to close several accounts, do one at a time. When choosing which accounts to cancel, first eliminate cards that charge you fees. Cancel new cards before old cards. (Remember: the age of the account affects your credit score.) Consider keeping cards that offer good rewards programs.
Before you cancel a credit card account, pay off the balance or transfer it elsewhere. Never attempt to cancel an account on which you still owe money. I’ve heard horror stories of banks raising interest rates on people who do this.
When you’re ready, follow these simple steps:
- Call to cancel the account. Check with customer service to be sure your balance is zero before you start the process. After you ask to cancel your card, the sales rep may try to talk you out of it. Be prepared to stand your ground. And take notes!
- Send written confirmation. Using your notes, write a letter and send it to the card issuer. You can find a sample credit card cancellation letter at The Dolans.
- Check your credit report. After you receive confirmation that the card has been cancelled, it may take several weeks for the change to be reflected in your credit report. It is your responsibility to verify that your report is accurate, so keep tabs on it.
Once you’re certain the account is closed, cut up your card! Hurrah!
Conclusion
Should you cancel your credit cards? Only you can make that call. Do what makes sense for you and your situation. If you think it’s more important to maintain your credit score, and if you’re sure you won’t abuse them, then keep the accounts open. But I think it’s a mistake to keep your credit cards if they cause you woe.
If you have trouble with compulsive spending, it’s best to cancel your accounts. Don’t just cut them up, but cancel them. Here’s a recent reader comment that reveals why sometimes cutting up a credit card isn’t enough — you have to cancel the account. When I was having trouble with credit, I cancelled my accounts, which bought me time to learn to manage money responsibly without an ever-present temptation to spend.
Update: Here’s a great discussion of this subject at the myFICO forums. Also, Subodh has some credit tips based on his experience (as opposed to the “official” word, which is what I’ve tried to dig up to share here).
Photo by Shuttercat7.
67 Responses to “How and When to Cancel a Credit Card”
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September 16th, 2008 at 5:47 am
Thanks for this very comprehensive list! However, leaving an account open just because it carries a balance isn’t always the best option.
In college, I received a letter from a credit card in good standing (I’ve never been late on a credit card payment). Due to a periodic review of my credit score, they were raising my interest rate from 15% to 32%. It was most likely due to my high credit to debt ratio and short credit history.
I asked what I could do to prevent the increase. They told me it would drop back down to 15% if I closed the account. I closed it immediately. I’m sure it wrecked my credit score even more at the time, but that interest increase would have really increased the amount of time it took me to pay down my debt. As soon as I had paid down a little, I transferred the balance to a 0% interest card and paid it off completely.
I’ve always wondered why they would double the interest rate on an account in good standing. Anyway, in this case, closing the account lowered my interest rate even though it still carried a balance.
September 16th, 2008 at 6:13 am
Technically, a ding in your credit score shouldn’t be a huge deal because the ideal goal is to get OUT of debt and STAY OUT of debt.
The only real possible issue in such a situation would be if you were to try and purchase a new home or something like that. I personally don’t plan on applying for anymore debt in the future except a mortgage if I move from my current house. I’m going to cut up my credit cards and pay for future cars with cash. With such a plan, a small ding in my credit score means almost nothing.
Remember, a credit score is not a determining factor of wealth (like net worth would be). It’s only a score on how well you are at balancing debt. Technically an extremely high credit score just means you’ve had debt for a very long time but have at least made the minimum payments. That’s nothing to be excited about. I’d rather have no credit than great credit (unfortunately that makes it hard to buy a house these days).
September 16th, 2008 at 6:16 am
This is a great post because I am just getting a credit card for the first time and these things are really useful to know. Also me and my fiance are getting married in 5 weeks and knowing how to increase your credit rating so you can get a homeloan easier is a great thing to think about.
Because I don’t want to go and get a home loan and they shoot me down because I have no credit rating and my job is that I am an “online entrepreneur/blogger” who doesn’t live as a slave to their ‘wage’.
Thanks for the post
September 16th, 2008 at 6:25 am
JD,
thanks for doing the research on this. I have always been of the opinion that I would just close them when possible, not really caring how it would affect the credit score. My main goal was just eliminating any temptation.
September 16th, 2008 at 6:30 am
In the past year, I really got my credit cards under control. I went from 6 down to just 2 (a Bank of America Visa card and a BestBuy rewards card). I am very close to canceling the BestBuy card, even though technically it is the older of the two cards (2003 compared to 2004 for the Visa card). It is just too tempting to buy tech stuff on it and it takes so long to get rewards out of it it really isn’t worth it.
I don’t get huge rewards out of the Visa (1 point per $1), but the fact I can manage it on the same site as my checking and savings accounts makes keeping track of my spending much easier. Having my spending scattered across several web sites I have found makes it much harder to reign it all in.
September 16th, 2008 at 7:09 am
I see this as a Debt Management Score! If you carry no debt you cannot rent a car? This makes no sense to me. If I can prove I make $50,000.00 a year, save 20%, and have NO PAYMENTS on any debt; why would anyone deny me a rental property, or a house?
Look at the indicators: How much you owe. How long have you owed. What type of companies do you owe. Any new debtors? Do you make (minimum) payments on time.
I use debit cards only. I carry cash and try to pay using cash (it is getting harder …)
One can also shop around to find a mortgage company that will research your situation and actually Underwrite your mortgage based on your income and outgo. Debt is a bad way to gauge if you can handle money.
September 16th, 2008 at 7:17 am
I have a question. I want to cancel a credit card I got just recently and that I’ve never used. The only reason I hesitate is because I will hopefully be needing student loans soon to finance graduate school. Do you think it would damage my chances for good rates etc.? My credit history is very short because I moved to the US from overseas only last year, but I do have another card I’ve had for longer.
September 16th, 2008 at 7:17 am
It is my understanding from the bankrate article that NOW you will not get dinged for simply closing you account. That they will keep the benefit from when the account was opened. That seems to be what is quoted from Fair Isaac in this article, although then is contradicted in the following paragraph. My understanding that one use to get dinged for closing accounts, but not anymore.
You can still get a lower score based on available credit.
September 16th, 2008 at 7:24 am
What do you do if you get a call every week from the fraud protection department of the CC Company and they’ve issued you two new sets of cards-which you haven’t even had a chance to use before they send new ones? That’s what I’m living with now. I don’t really want to close the acct because I still have 12,000+ rewards points on it, but I can NOT keep dealing with this fraud stuff. I really need to just cancel the account, I think, so thanks for this list. (I don’t carry a balance on the card and just made a payment, so I should be able to cancel immediately.)
I have a small pile of CC I never activated but keep meaning to cancel (mainly store cards I got to get the extra discount and never used again), so this is very timely advice.
September 16th, 2008 at 7:26 am
Dining your credit score can be a huge deal since it is now used for things other than obtaining new debt. A lot of insurance companies now use the fico score to determine rates. The thought is the higher the credit score, the less likely to make a claim. Not every insurance company does this, but I think that more and more will in the future. While I don’t agree with this practice, I don’t want to pay higher rates just because I have a low credit score due to having no credit.
September 16th, 2008 at 7:29 am
I recently canceled a credit card and was able to do it on their website. They mailed me a confirmation letter.
September 16th, 2008 at 7:46 am
I’m closing mine as fast as I can pay them off. I couldn’t care less about FICO. I may end up keeping one card after they are all paid, but I haven’t decided yet.
September 16th, 2008 at 8:27 am
Keep in mind your FICO affects our insurance rate, and many other things that we do financially. Even employers use it when applying for a job. Probably the most important number attached to you besides your SSN is your FICO score.
September 16th, 2008 at 8:31 am
I don’t think credit cards are good at all. If you can, cancel all of them. The only exception is if you are trying to buy a house and are going to need a loan, keep the credit card open so it shows you have revolving credit and your debt ratio is good.
I did that before canceling all of my credit cards.
September 16th, 2008 at 8:33 am
Thanks for explaining things so clearly! I closed one card when I paid off my debt because it carried an annual fee. Good to know that it probably didn’t hurt my credit score too much, but I will check to make sure it is really closed.
September 16th, 2008 at 8:35 am
I have a question in relation to this post. I have been carrying a few credit cards since I was a student. I no longer use those, as I use a citi card with good reward program. I have zero balance on every other card. I didn’t cancel the old credit cards, becos it will affect my score. Instead, when the card expired and when they sent a new one, I didn’t activate the new one. Is this a right thing to do ? Will this affect my credit history or score ? Any advice will be appreciated.
September 16th, 2008 at 8:49 am
Please clarify the clear contradiction on Fair Isaac quote. It seems like you can’t hurt your FICO score if you cancel an unused account but latter it reads that yes you could dig it? WTH?
Thanks,
Joe Gomez
September 16th, 2008 at 8:50 am
If you close a credit card that is in good standing, it still remains in your credit report for the next ten years.
So that means for the next ten years that cancelled card will still contribute to your average account age and credit length.
September 16th, 2008 at 8:54 am
I keep my unused credit cards opened. When they send me the new card, I don’t even bother validate it, I just cut it up. Is this a bad thing?
September 16th, 2008 at 8:54 am
@Joe Gomez and others
What you’re reading in the Fair Isaacs quote isn’t actually a contradiction. It’s talking about two different scenarios.
The first is a situation where you have no credit card debt at all, just open accounts. Closing cards in this case will not affect your credit score, and it’s okay to do it.
The second situation is one where you have trouble managing credit responsibly and are carrying a balance. In these cases, it’s also good to close your accounts, even though your credit score will take a ding.
September 16th, 2008 at 9:14 am
Wow, this is timely for me. I was just sitting here this morning closing my credit card accounts, when I decided to stop for a few minutes and read your blog! I’m not closing the accounts out of fear of using the cards, because I am 100% committed to paying off my debt and never going into debt again, partially because your blog has inspired me so! Mainly I’m closing the accounts because I have too many, and I want to simplify my life. It doesn’t make sense to have accounts sitting around with a zero balance, and it’ll be one less thing for me to manage. It also feels REALLY empowering to cut those cards up one by one. In the interest of maintaining my excellent credit score, I am keeping one account open, that being the card that I’ve had the longest. Thanks for the inspiration. I’ve been reading your blog for quite some time now and am very appreciative of the information and ideas that you share.
September 16th, 2008 at 9:37 am
I absolutely agree with your conclusion.
Every individual situation is different. For some people, it just doesn’t make financial sense to keep those credit cards open.
The one caveat I would add is that if you are planning to get a home or auto loan in the next couple of years, then it may make more sense to leave the accounts open until you get the new loan.
There is no sense in closing out a credit card acount, having it lower your credit score, and then paying more in interest on a new loan.
It makes perfect sense to close out the account after the loan though, if that is what you feel you need to do.
As long as you don’t charge more than 30% of your available credit, you make your payments on time, and you (hopefully) pay that card off each month, then your score will recover from closing an account with no issues whatsoever.
September 16th, 2008 at 9:54 am
Still think it’s hilarious that you’re assessed based on how much debt you carry, not whether you can afford the debt.
Still, I guess it gives the seat warmers a job to do.
September 16th, 2008 at 9:56 am
I think most of you are looking at it from the wrong perspective. People who are lending you money want some assurance that you will pay it back. That is what the FICO score is all about. A measure of how likely you are to pay back a loan.
Saying that you have money or go to church every Sunday has very little to do with that.
September 16th, 2008 at 10:53 am
Don’t care if it affects my FICO… I am so tired of the yahoos down at BofA… That card’s gone… They lie and maneuver. I never had any problems with my card until BofA bought MBNA. It goes. If I never have to deal with BofA again, it’ll be too soon… That goes for Etrade as well.
September 16th, 2008 at 11:01 am
I had a credit card company cancel a card on me simply because I had not used it in about six months.
I wonder how that effects my FICO?
Any ideas?
Thanks,
September 16th, 2008 at 11:08 am
Brian,
It will lower your FICO score, but I doubt you should worry about it. I mean, if you’ve got good enough control over your credit that you didn’t use the card for six months, then I have no doubt that your score will be just fine.
As long as you keep your balances low, and keep making payments on time, then closing out a few accounts is fine. It’s the people that have high revolving debt or late payments that should be most worried about closing out their accounts.
September 16th, 2008 at 11:10 am
Ok, so I see it mentioned in the commits a bit, but not in the article at all. Any one know how much available credit actually affects your credit report, if at all?
September 16th, 2008 at 12:26 pm
You don’t have to call the credit card company to cancel the credit card. It’s much easier to just send the letter. I have done this with 3 credit cards this year. They all sent me a letter back confirming it was closed.
September 16th, 2008 at 12:47 pm
Is it common to use multiple credit cards where you live? I checked with my friends here in Sweden and most of them have only one card, None of them knew another person with more than one credit card. Also, most people here are using debit cards, not credit cards.
I can’t find a good reason to get more than one card. Can you please explain this habit?
September 16th, 2008 at 1:31 pm
David, many stores and gas stations offer their own credit cards, and the stores will offer you a discount if you get one of their credit cards plus add you to their mailing list so you can find out all their sales. These cards usually have very high interest rates and fees.
Plus different cards offer rewards on different kinds of purchase (things from grocery stores versus gas stations, etc.), so one might use different cards for different purchases to maximize the rewards. The rewards are also limited, so if you purchase too much to get rewards on all your purchases from one card, then you might want two. Rewards cards also usually have very high interest rates and fees.
In addition, you might want a card with low interest rates, in case you want to charge something you can’t pay off right away, and low fees, in case you make a mistake. Perhaps this is the only kind of card people get in Sweden?
September 16th, 2008 at 1:59 pm
David… You seem to be leaning towards the view that Americans abuse their credit by having too many cards. In fact, you would be correct. Many people have an excessive amount of debt and there are TV shows here where some person stands there like an idiot while confessing to having $80,000.00 in Credit Card debt, a large mortgage and 2 car payments. The host is supposed to try to provide a means for them to handle their debt while earning $40,000 a year. Pretty sad.
Having said that, there are reasons to have multiple cards in the US .. And to not have ATM cards. The main reason I can see for not having a cash type card is that there is no protection if someone accesses your account fraudulently, whereas a credit card has a maximum cost of $50 if you report the fraud within a specified period of time. My Etrade ATM card has been fraudulently accessed several times now.
Another reason is to take advantage of cash back on purchases. Each card has specifics for a return of part of the purchase price. One may do so only on gasoline purchases, another on your top 3 types of purchase. I therefore have two cards to take as full advantage of that aspect as possible.
And, if you have a business, or rental properties, it becomes considerably easier to keep expenses separate for tax purposes.
lastly, one card may carry no charge if you pay it off each month, and a second card may have a lower interest rate, and might be used for larger unexpected expenses.
When my father came back to the US, he was surprised at the fact that his credit rating was considered so bad.. After all, he never had a credit card. From the banks’ point of view, he also had no verifiable credit history.
jegan
September 16th, 2008 at 2:05 pm
Evan…. Don’t know the answer to your question, but you can go to the FICO site and punch in a variety of numbers to see …. This is the site:
http://www.bankrate.com/brm/fico/calc.asp
jegan
September 16th, 2008 at 2:12 pm
If you have several cards under the same issuer, sometimes they let you transfer your available credit to raise the limits of other cards. So you can actually transfer most of your available credit to one card and then close the rest with minimal impact to your credit (unless the ones you close are long-standing accounts)
September 16th, 2008 at 2:25 pm
I think there’s an important variable here you are missing by advocating that people simply cancel their credit cards.
By canceling longstanding credit cards, you are shortening your average credit history. This will cause a drop in your credit score. Also, canceling cards with high credit limits and low balances (low utilization of credit limit), you are hurting your credit score. The FICO score takes into account your utilization % across all credit accounts.
So let’s take an example. Say you have two credit cards, each with $10,000 credit limits. Say one card is 10 years old and has a $0 balance, and the other card is 2 years old and has a $1,000 balance. Canceling the 10 year old card will not only lower your average account age (from 6 years to 2 years), it will increase your utilization % (from 5% to 10%). Both of these actions will have adverse affects on your FICO score.
There seems to be no solid, FINANCIAL reason to cancel a credit card (unless, of course, it has an annual fee that outweighs its benefits to you, in which case, cancel away). If you are just trying to avoid the “temptation” of available credit, well, sorry, but you have deeper problems…
September 16th, 2008 at 2:34 pm
That breakdown of the FICO scores was really helpful. While house-hunting in past months, my wife and I were rather surprised to learn how good our credit ratings were–above 750–with such little credit history. After “over 40 years of credit history and never missing a payment”, my father said his score was lower–I guess it’s due to his using substantially more of his available credit.
September 16th, 2008 at 2:40 pm
There’s a couple of good reasons for having at least one credit card with an available balance, even if you are committed to staying debt-free.
If you charge a large purchase to a credit card (even if you pay it off immediately), you have protection if the company you’re dealing with goes out of business, if the product is defective, or even if it’s lost or stolen.
If you need to make a reservation that involves a “hold” on your card, it’s not generally convenient to use your debit card for that purpose.
Many rental car co’s charge more if you use a debit card (or won’t let you rent at all).
Etc.
September 16th, 2008 at 3:37 pm
When asking the representative to cancel your card, insist that the CC company reports to the credit bureaus that the account was closed at cardholder’s request. It looks better on your credit report. Make sure to check your credit report later to verify that the note was placed.
September 16th, 2008 at 3:58 pm
Heh. Some of the comments (here and on other sites) have me double-checking my research. So far, so good. I’m still finding the same answers, and I stand by what I’ve posted above.
However, I did find a new piece of information in a booklet from Fair Isaac. They recommend keeping at least one or two cards:
Have credit cards — but manage them responsibly. In general, having credit cards and installment loans (and making timely payments) will raise your FICO score. People with no credit cards, for example, tend to be higher risk than people who have managed credit cards responsibly.
This meshes with my own experience. During my no-credit card period, my credit score was lower than it is now. The difference? I have a credit card and use it responsibly.
September 16th, 2008 at 4:11 pm
I just found a great thread at the myFICO forums: Closing credit cards the right way. Though the title is something of a misnomer (it doesn’t actually explain how to close credit cards), the post does explain the precise effects of credit card closures. To quote:
Closing a CC (credit cards) does not lower your FICO scores in and of itself. When deciding to close a CC there is two important things to consider. In the short-term, closing a CC can have adverse effects on your UTIL percentage calculations and this in itself can definitely lower your scores. In the long-term, a closed CC in good standing (nothing derogatory reporting) with a $0 balance will generally be deleted from your CRs (credit reports) after 10 years. Once this account is deleted, you lose the history and age and this might lower your scores.
I’ll add a link to the main post above.
September 16th, 2008 at 4:57 pm
I see some of the Ramseyans are out spewing their nonsense about “debt scores” and credit scores meaning someone had to “be in debt” or owe interest.
Baloney. One does not need to take on debt to have credit scores and a high credit score does not require managing large amounts of debt. Responsible use of credit is practiced by the majority of consumers.
GRS is a great blog and JD is a great PF writer because he takes a rational approach and offers reasonable opinions on available options. There is no need for endless preaching of “no credit” dogma. Once you’ve heard the head minister, there’s no need to heed the recycled “advice” of his followers.
September 16th, 2008 at 5:02 pm
How funny: I just closed two cards last night and my wife closed one. These were store cards and a newer card we don’t used anymore.
September 16th, 2008 at 5:49 pm
I think this post hits a lot of people in a pretty familiar spot… the ‘oh crud’ spot. This occurs when you read this an already canceled a card (or two or three). I have not canceled, my credit cards yet that do hold a balance, but I was on edge. Especially with everything that has been going on with the market. Interest rates scare me and if I do not have them, I will not use them. Thank you for this insight into the pros and cons of canceling a card!
September 16th, 2008 at 6:06 pm
JD,
I think you made an error in regards to this post. If you rent an apartment, it does not impact your credit in any way. Like you said, your credit score is only indicative of your debts. If you don’t pay your rent, it will put a ding on your credit, but the mere fact of having an apartment, or anything that doesn’t have debt associated with it will not impact your credit.
I have an apartment and a cell phone, but never had a credit card, and I have no credit information at all. No credit score. No nothing.
September 16th, 2008 at 9:28 pm
JD, I really appreciate all your research on this topic. I was trying to figure out if I should close my credit card. I have had it for over 7 years (my longest credit card) and it has a balance of $0 that I have kept that way for years now. I am currently using a Citi card that I get reward points for. I never use that other card. Should I close it? I am not sure because of the length of credit. Whats your opinion??
September 16th, 2008 at 9:58 pm
I know people that have been denied jobs due to their credit score. This was in CA. I think that using FICO for jobs and car insurance is SO inappropriate, and I believe there are some bill in CA to get this practice banned, at least regarding the insurance.
September 16th, 2008 at 10:12 pm
JD, I am not sure you are right on this article. According to FICO, even though the closing of account in itself may not be a factor but reducing your overall balance causes upto 30% of fluctuation in your FICO score. The closed account will still remain in calculations and on your history for 7 years. So, you would still divide your available account balance which is now reduced by just as many number of credit accounts, not by one less. The divisor does not decrease while calculating average available account balance for upto 7 years.
So your credit score will definitely go downwards
September 16th, 2008 at 10:28 pm
@Jack (and others)
I’m willing to admit I may be wrong, and have already made a couple corrections to the article. If somebody can point to something online from Fair Isaac that specifically states that closing a credit card will definitely cause your score to go downwards, I’ll link to it.
But from everything I’ve found, including the Bankrate article (with quotes from the Fair Isaac spokesman), the message boards at myFICO (run by Fair Isaac), and from Fair Isaac publications, closing unused credit accounts is not necessarily a bad thing. Doing so will never help your credit score, but it won’t necessarily hurt it.
From everything I’ve read, if you do not carry a balance, and if you have other sources of credit, it’s okay to close your accounts.
September 16th, 2008 at 10:41 pm
Oof. I should be in bed, or at least writing Friday’s “Ask the Readers”. Instead, I’m reading through the forums at myFICO some more. I’m not seeing anything that contradicts what I’ve said. Here’s another post that backs up my research.
However, this post does note that if you use your credit cards, your balance is never actually zero in the eyes of the FICO score. Each issuer reports your balance every month, so if you charge about $800 a month but pay it off, the FICO score still counts you as having an $800 balance. Because of this, closing an unused card can increase your utilization ratio, dinging your score. But again, I think the ding is just that: a ding. I don’t think it’s a big drop.
I may sign up for the FICO score thingie just so I can play with the simulator.
September 17th, 2008 at 8:55 am
Eek - careful with what you’re recommending here! Not sure you’re giving enough consideration to one’s credit utilization ratio. This can have a bigger impact on your score than you think.
For those who can’t resist the temptation of an open credit card, consider cutting the card up so you can’t use it instead of closing the account. Ultimately, having a greater amount of credit available to you may be more helpful in the long-run in terms of your credit utilization ratio — especially if you carry a balance on any of your cards.
I speak - er, type - from experience. I closed a few credit card accounts thinking - logically - that if I didn’t use them, no need to have them on my record. It dinged my credit score considerably. I’ve since gone the way of keeping cards I no longer use open — just put them away or cut them up — and my credit score definitely indicates that this is the way to go (I have an 800+ score).
September 17th, 2008 at 9:34 am
Based on continued reader feedback, I’ve made some edits to the post. The biggest change is a new paragraph after the quote from Bankrate. I’ve attempted to emphasize that closing your cards can never help your credit score, and can often hurt it even if you think it won’t.
I still think it’s a good idea for compulsive spenders to close cards when they’ve paid them off, credit score be damned.
September 17th, 2008 at 10:03 am
There is an additional factor that can show up in some loan evaluations that is not reflected in the credit score.
A friend of mine was applying for a car loan. Near perfect credit, but he was turned down. Why? He’s a grad student, making about 20k, but had well more than that in unsecured credit lines. The loan officer explained that even though he had no debt, he was considered risky because he had access to so much unsecured credit, relative to his income.
He got rid of some (I believe he called to have some limits reduced, and may have cut some cards), and got a good rate.
Good to know my credit union is picky, I guess. Not sure how widespread this practice is. Though it’s so easy to get credit cards, that I’m not sure why they care so much…he could just go apply for a dozen more, THEN go hog wild.
September 18th, 2008 at 5:56 am
Thanks for this info. I’ve always been worried about credit card debt. And yes, I’ve been buried in it too.
My aunt was telling me about negotiating a settlement with a credit card company if you’re having a difficult time paying them. How true is this? She said she was able to cut down around 30% of her bill. But I wonder if this hurts your credit rating.
September 19th, 2008 at 9:02 am
I was just reading out of curiosity and how much I learnt today. nice article and very educative follow up links. I specially liked the part in which Subodh says
“Credit score is not about having a lot of credit lines and still not having debt. It’s more about, having a lot of credit lines, having used all of them in the past and still be debt free.”
That explains why I was refused a card at Macys. I have been doing it wrong by trying to keep just one credit card open and not much of balance
But I learnt one thing. After Macys refused me a card, I was able to write to get my credit report and boy! it has opened my eyes
thank you J.D for an informative post
September 19th, 2008 at 4:53 pm
recently, i had the (crazy?) idea of using a ‘negative balance’ on a credit card as a gift card to possibly help one budget him/herself. (http://tinyurl.com/4lkgf5)
you mention,
“Even if you pay off your cards every month, the issuers still report a balance to the credit agency.”
my question:
how does maintaining a ‘negative’ balance instead (overpay intentionally or not) affect one’s scores, if at all? how is a ‘negative’ balance reported to a credit agency?
September 20th, 2008 at 11:58 am
And you are correct having more than 1 card usually means a better score as it’s easier to predict risk. Make sense?
While I can see scenarios where it makes sense for some people to close them, I think cutting them up and placing the remnants in a drawer is still the way to go for most folks. I’ll concede this doesn’t work for the people who have their cc #s memorized and use them to shop online all the time. But most people should try the cut-up approach first. Again though, there are no absolutes. Feel free to contact me with more questions. I’m happy to discuss it.
September 21st, 2008 at 8:28 pm
Andy,
I get your point, but I hate the idea of thinking about these cards when I don’t even use them. Say I have four cards with a zero balance (I never use them). The two oldest card are five years old each with a 5K limit. My two others have 3K limits. Couldn’t I counteract by just calling and having those older card credit limits extended to total 16K or more? Then I keep open the old cards and close the two new ones. No hit to my C.U.R and I have less credit cards open.
September 25th, 2008 at 10:20 am
At least one (progressive motorcycle)insurance companys want you to HAVE a long term credit card plus five (yes 5) open lines of credit.
Their thinking (straight from their underwriting dept when I questioned this) is that someone with more credit loans and a long term credit card is more apt to NOT file claims versus a person (cheapskate?) who manages money well and will get the money out of the company for any small ding on the vehicle…
September 25th, 2008 at 12:11 pm
Econobiker apparently was provided 1/2 an explanation. Insurance companies these days look not only at your past claims history, but at your credit as well. The thinking is that people that manage their credit and pay their bills on time also manage the rest of their life properly, keep their vehicles and home in good repair, and generally behave in a sensible fashion. The result, in their eyes, is fewer claims. Then of course there is the concern about people who can’t make their car payment, or house payment, coincidentally having a fire, or theft which might resolve their problems.
Although it is annoying, it really is a symptom of our cookie-cutter, computer program driven society. We no longer can go down to the local banker, who has known us all our lives and have him extend credit because ‘he knows that we are good people’. Welcome to the Matrix, Neo!
jegan
September 30th, 2008 at 2:56 pm
Over the last three years, I’ve aggressively paid off several credit cards, each with LARGE balances - equivalent to a whole year’s take-home pay. In order to prevent ruinous rate hikes, I closed all but one of them - the one with no balance. While paying the cards off, I have lived entirely on cash and my Diner’s Club charge (not credit) card.
Frankly, access to this credit got me through a very difficult period, during which my credit score was less important than keeping the lights on. I never missed a payment along the way and was vigilant against any efforts to raise my rates.
While paying the balances, I also managed to put money in my 401(k) and build an emergency fund. I was able to put about 40% of my post retirement savings take-home towards debt reduction.
Now that the balances are virtually paid, I’ve seen my credit score go from mid 600s to 824 in just a couple of months. I also find myself able to save a LOT more each month, so the idea of having a flush emergency fund, a well-funded 401(k) AND being able to buy a home is now realistic.
My point is, that unless you expect to NEED to get credit, worrying about your credit score is pointless. Know the terms of the cards you carry. If closing an account sets off a penalty rate, don’t do it. But if it doesn’t and you can avoid a rate increase, do it and don’t worry about your credit score. Your score will recover later, as has mine.
October 7th, 2008 at 10:53 pm
Lulu, your idea has merit, but be warned, the last time I called for a credit limit increase, they told me it would be an inquiry as essentially I’m applying for new credit [really just more credit]. The reality is that most high score people carry 5-7 cards. So, if it’s a matter of convenience, I’d still keep them open.
October 8th, 2008 at 7:59 am
John Egan,
It was actually the opposite of what you wrote:
” The thinking is that people that manage their credit and pay their bills on time also manage the rest of their life properly, keep their vehicles and home in good repair, and generally behave in a sensible fashion. The result, in their eyes, is fewer claims. Then of course there is the concern about people who can’t make their car payment, or house payment, coincidentally having a fire, or theft which might resolve their problems.”
That insurance company (Progressive) figures that someone with their financial life together is MORE apt to file a claim than someone with multiple lines of credit. That someone with a handle on finances would get more money out of the company than someone without structure…
This same credit review for insurance also wanted me to have an open line of credit for more than 10 years or so and claimed I didn’t. I had to tell them of one credit card which I’ve had since 1988 that they didn’t seem to have in the “record”. Overall this credit review for insurance seems just like an additional way to get money out of the consumer…
October 8th, 2008 at 2:56 pm
Andy, or others who may know:
I have about 13 credit cards (a few from stores) open or inactive, with no late payments. I currently use only 2 of these cards, and pay my balances in full each month. Due to the recent financial upheaval in the country (I assume) one of my cards notified me it had been closed due to lack of use, and two more have notified me they will close if I don’t use them or request them to stay open.
I don’t really want or need so many cards, I’ve just been afraid to close them and lower my FICO score. I had planned to close one a year, which I believe is Suze Orman’s advice, but the ones who have notified me would not be my first choices to close, as they are high limit accounts I’ve had for some time, Any advice?
Can a card that is closed by the company also lower my score? (or in my case multiple cards)
Although I don’t need the cards, I want to keep my score up there for a future mortgage. Thanks.
October 8th, 2008 at 10:13 pm
Katie, this is starting to happen more and more. One of my cards changed its description from “Charge
Amount in H/C column is credit limit” to “Closed or Paid Account/Zero Balance Charge”. My score increased 5 points, but i’m still sorting this out.
Closed cards, whether you do it or they do it, will impact your score. Just like if they lower your credit limit. The scoring system doesn’t discriminate.
If you have the option, as you mentioned, of requesting they allow you to keep the cards open, just make that request. Worst case, you can use them, but if they are store cards and you are forced to use them or lose them and you have no need for items from that store…i’d let them close. Fruitless spending trumps credit score stability in this situation
October 18th, 2008 at 8:26 am
I have both corporate and personal cards. One of the oldest, with a credit limit over $20,000, is my Advanta corporate card. Although I have not used it for some time and carry no balance on it, they recently raised the interest to 30%. At the moment, the corporation carries no debt at all except for cash charges that are always paid in full each month.
I would now like to open a new corporate credit account with my bank in order to link it to my business account and have overdraft protection and eliminate monthly maintenance fees.
(My personal cards are either unutilized or carrying balances of 50% or less of the credit limits and interest rates of 1.99 to 4.99%. I have been told by two banks that the personal FICO score has no effect whatsoever on the corporate score and vice versa. I have no intention of applying for any more personal cards and am paying these off at speeds based on their interest rates.)
Question 1: Is it true that the personal and corporate FICO scores do not affect each other at all as far as credit card companies are concerned?
Question 2: Does the high credit limit/ high interest on the Advanta account negate the advantage of the age of credit history and total available credit, making it better in this case to just close the account before applying for a new corporate account with my bank?
Thanks for this informed and enlightening discussion.
October 18th, 2008 at 9:55 am
LCP, Here are my thoughts.
Answer Q1: Your corporate credit rating doesn’t interwine with your consumer FICO credit score. Your corporate credit rating is through D&B. But, here’s the deal. Most business credit cards are personal credit cards. If your advanta is on your personal credit file, it’s really a personal card with a business brand name. My Amex card is the same way, it says “business” on it, but it shows up on my personal credit file and doesn’t show up on my business account.
Answer Q2: Does it have an annual fee? If not, don’t close it, just cut it up and keep it in a safe place. Credit History is only 15% of the score, so keeping our overall credit limits is more important.
October 18th, 2008 at 3:02 pm
Thanks for the prompt response.
I guess the “business” cards are really personal after all. That means that I have a lot of available credit - maybe too much - and too many cards!
Is it possible to have too much available credit? This whole discussion seems to imply that as long as you pay your bills on time and have a minimum of debt on any given card, you can have any number of them - and any amount of total available credit!?
Sidebar: Although it does seem that lowering your credit limit (especially if the credit card company does it) can have a negative affect on FICO, no one has addressed the sudden tripling of interest rates. Advanta in particular seems to be doing this to everybody (or maybe just those with high credit limits?) Just GOOGLE News
the phrase [Advanta raise credit card rate] and see how many others have been caught in this! I suppose other credit card companies are aware of this and so might ignore the recent rate increase in this case. On the other hand, if they really don’t want to lend, who is to say they won’t just cut the limit next, and that will have a negative effect?
We live in very perilous and confusing times.
Thanks again.