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Three Reasons Not to Close a Credit Card

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Advance Personal Finance

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If you love credit cards as much as I do then there is a pretty good chance that you have quite a few in your wallet and even more in your dresser drawer. Regardless of what you might be thinking I have a credit score of closer to 800 than 700. A lot of that is due to the fact that I tend to leave credit cards open instead of closing them after I have received the signup bonus.

Now don’t get me wrong, there are certainly times when it makes sense to cancel a card. If it has an annual fee that doesn’t make sense to pay each year then you should probably close the account. However there are also a few reasons that actually make it worth keeping a card open and active well into the future.

Maintaining Your Age of Total Credit

There are several different factors that are considered when calculating a credit score. One of those factors is the age of all your credit accounts. The higher it is the more it’s going to benefit your overall credit score. As an example let’s assume that you have three credit cards. One of them is six years old, another is three years old and the last is one year old. That means your average length of credit is 3.33 years. Now let’s assume that you are contemplating canceling the six year old card because you never use it. That would mean your average length of credit would drop to just two years and could actually knock points off of your credit score. You always want to keep open your oldest credit cards.

Your Credit Utilization Ratio Will Be Affected

Other than paying your bills on time, one of the biggest factors of a persons credit score is their credit utilization ratio. This is how much debt they have compared to the amount of total credit available to them. Lets assume that you have three credit cards with a total available credit of $20,000. On those three cards you have $4,000 worth of debt. Your credit utilization ratio would be 20 percent. Now let’s assume that you decide to close a card that has a $10,000 credit limit and no debt. That means your total debt is still $4,000 however your total available credit has dropped to $10,000. Your new credit utilization ratio would be 40 percent. Because you cancelled that credit card you will almost always see a decrease in your credit score.

Have The Credit Available If It’s Needed

No one ever plans to have something bad happen, but you never know. Your water heater might stop working, you might have a major medical event, or maybe your car needs an entire set of tires. Instead of closing your credit cards it might be a smart idea to keep them open as a backup source of funds if the need arises.

The Bottom Line

If you are thinking about closing a credit card there are a few things that you need to consider before doing so. If it’s going to drastically change your average length of credit or negatively change your credit utilization rate then it might be smart to keep them open.

 

*Editorial Note: Any opinions, analysis, reviews, or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by any card issuer.

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