Why You Shouldn't Close Unused Credit Cards

If you’re like many debt-conscious Americans, keeping a close eye on your outstanding credit card balances and trying to pay off all of that debt is a never-ending battle. However, you shouldn’t take it to the extreme by closing your unused credit cards because closing zero-balance credit card accounts can be very detrimental to your credit score.

Closing credit card accounts—whether they’re bank-issued, department store or oil company cards—can hurt your credit score in a couple of different ways. More than likely, the biggest hit will be to your ratio of credit used to credit available (often referred to on your credit report as “amounts owed”). Since this ratio is 30 percent of your total score, you’ll want to keep your credit used/credit available ratio as low as possible.

For example, if you have four credit cards with a total combined limit of $8,000 and your total combined balance between those four cards is $2,800, your balance/limit ratio is 35 percent. If you decide to close one of those credit card accounts—let’s say one that has a $1,500 credit limit—your ratio will jump to a less-appealing 43 percent.

The “age” of your credit is also important in determining credit scores and closing a long-standing account could lower your score. Generally, older credit is better than newer credit as older credit is a better indicator of how a borrower is able to handle credit going forward.

Also, if you have a credit card that you’ve had for a long time and you have a good credit history with that card, you’ll want to keep that card active—even if it has a zero balance. As long as it’s an open account, your good credit history with that card will continue to show up on your credit report. If you close that account, it won’t disappear right away, but it will fall off of your report in 10 years.

Is there ever a good reason to close a zero-balance credit card? Of course. If you’re the victim of identity theft, closing an account is a no-brainer. Or, if you have great credit and your credit score is in the upper echelon, closing a credit card may not have much of an effect on your score.

However, those are rare instances and many of the reasons people give for closing an account aren’t quite as valid. Did the interest rate on your credit card go up? It shouldn’t matter if you’re not using the card. Are you sick of paying an annual fee? Try calling your credit card company and see if they will reduce or eliminate that fee. Are you trying to simplify your life? That may be a valid reason, but it could complicate your life later on when you simply have to have a good credit score. ∆