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.
If you leave old credit cards open with no charges or activity for a long period of time, the bank/CC company might close it. So it’s important to occasionally use it every 5 or 6 months. Just make a small purchase like a pack of gum or A BRAND NEW CAR!!!!
Yes, that is a good add-on point. Credit card companies differ on this, but a charge every 6 months or so should suffice.
You can try to get the fee waived. I do this each year the month before my annual fee will take effect for my Citi AAdvantage card. I call and tell them that I want to cancel my credit card because I do not want to pay the annual fee. They shoot me over to their customer retention department who tries to convince me to stay. I stick with my initial statement, repeating that I do like the card, but that I don’t think it is worth paying a fee. The customer service member apologizes and says that I will be missed, and begins to “close the account” until a special offer pops up just for me. They offer a credit that is equivalent to the annual fee, provided I spend an amount equivalent to the fee ($95) with the card during a certain timeframe (I believe it’s 90 days). This credit essentially zeroes out the fee. Just ensure to have zero balance on your card in case they call your bluff. I’ve done this for the past four years, and my wife has done the same. Unfortunately, this year they called my wife’s bluff and closed her account, oh well. This also works with cable and internet. After your introductory price spikes up after the year just call to cancel. They will offer you a lower price but if they don’t, just hang up and try again, or do cancel and open the service under your spouse or roommate at the introductory price.
This is worth a shot – but mileage may vary. I’ve tried this with Amex and Chase, to no avail a number of times. Could depend on the rep you get and the credit card company.
My credit score is so high, that I didn’t worry about the hit of closing an old card. I hadn’t used it in years, and I just felt kinda anxious leaving it open. For me, it was worth the peace of mind to close it. :)
One thing I’ve done in the past is consolidate or downgrade the credit card with an annual fee to something that doesn’t have an annual fee. I believe the credit score will then be based off of the combine the credit line and it will take the older credit card for history.
What about young credit cards that you don’t use? Maybe 1-3 years old. If you have old cards that are still in use would you recommend closing down the unused newer cards?
I’ve been aggressively attacking my debt and have cut it in half over the last 12 months.
I still have a card from 2006 that was closed by Citi after I declined an increased interest rate in 2008. They were trying to change it from a fixed to variable rate and I declined in writing.
It’s a relatively low balance (about 10% of my total debt), with a fixed 8.99% rate, but the account is closed and unusable. My other card (which I’ve had since 1996) has a variable rate that’s now up to 14.99%.
I’ve opted to not pay off the fixed Citi card and pay the minimum and apply more to my higher interest (and higher balance) variable rate card.
Is this negatively affecting my credit score because I still have an open account even though the bank chose to close the account? I could pay it off tomorrow, but I’d rather chip away at the higher interest rate card, which I can’t pay off immediately.
Great article, DON’T cancel your cards get paid from them. I share my credit and get paid to add clients of IZM Credit Services as authorized users on my credit cards for 60 days, they pay $100-400 per client added, depending on age and credit limit Their clients do NOT get the card or any of my information. Their clients only gets the years of perfect payment history added on their credit files giving them a credit score increase. It only takes a few minutes to add or remove their client.