Do you have an old credit card just sitting unused in your wallet, sock drawer, or wherever you keep credit cards that has left you wondering “should I shut down that old credit card”?
A 20somethingfinance reader, Emily, writes in with a similar question,
“Should I close an old credit card that I no longer use? What is the impact on my credit score?”
It’s a great question – one that I have myself wondered previously as my credit card collection grew well into the double digits. And as with most things finance related, the answer is not so simple.
More important than credit score impact, in my mind, is the following:
- do you pay an annual fee for the card?
- is the value you get in return worth the fee?
Many credit cards that come with an annual fee offer some sort of value – even if you rarely or never use the card (check out a few of my favorites on my “money saving products” page). For example, many hotel cards grant you a certificate for a free night each year or a certain number of points that could be equivalent to a free night. If that is something you value, and the value is definitely more than the annual fee of the card, then the answer is simple: “keep the card”.
On the other hand if you are paying an annual fee and getting less value in return than the fee you are paying, then close the card.
Then there are the credit cards that have no annual fee and little to no usable perks. These are the cards that maybe offer 1% cash back and you thought that was awesome at the time (before realizing they almost all at least offer that), or they came with a nice signup bonus but little incentive to use the card beyond an introductory period. From a credit score standpoint, should you just leave these cards around to collect dust?
The answer is usually, “yes”. Here’s why.
There are 2 factors that are part of the credit scoring calculation that would be negatively impacted by closing a credit card:
- Length of credit history.
- Credit utilization ratio.
According to FICO, these factors are fairly significant:
With FICO’s calculation, length of credit history makes up 15%. And credit utilization ratio is a significant part of the “amounts owed” category, which makes up 30%.
Length of credit history (aka “average age of accounts”) is interesting because even closed accounts “age” after they are closed in FICO’s calculation. They age until they’re removed from credit reports 7-10 years after the date of closure or the last reported account activity, whichever came later. So the short term impact on length of credit history is zero, but the long term impact of a dropped account can be significant as your average age of accounts would decline.
Credit utilization ratio is more clear. If these were unused cards, then your credit utilization ratio would increase (a bad thing), because your total amount of usable credit would decline by the amount of credit line that card carried.
VantageScore, a competitive rating service to FICO, has similar rating factors, but will look at only open and active accounts instead of open and closed. The impact to average age of accounts is more immediate with VantageScore.
So keep those no annual fee cards open! The positive impact to your credit score should outweigh the very minor annoyance of an extra card sitting around.