If you are considering whether you should close credit card accounts you aren’t using, keep in mind that doing so can be a sizable mistake. Generally speaking, it is a good idea to keep credit card accounts open, even if they are not being used.
Bolstering Your Credit Utilization Ratio
Credit utilization ratio refers to the comparison of the total amount owed—the balance—on all credit cards and the combined limit on all credit cards. A lower utilization is desired when attempting to increase one’s credit score. When this ratio is raised, it causes one’s credit score to decline.
To illustrate this concept, suppose John has two credit cards, each with a $5,000 limit for a total available credit line of $10,000. On one card John owes $2,500, and on the other, he owes nothing. By dividing the balance by the limit, John’s current credit utilization ratio is found to be 25 percent. John decides that he would like to close his unused account. This lowers his total available credit line to $5,000. Using the same calculation, John’s utilization ratio has now been raised to 50 percent, thus potentially impacting his credit score.
By canceling an unused credit card, one’s credit score is potentially affected. Considering this statistic is nearly as important as payment history, one should endeavor to keep an unused credit card account open as long as possible. An unused account should not be closed if a credit check is expected in the near future.
Credit History Gets Better with Age
Another factor to keep in mind when contemplating closure of a credit card account is the age of the account. Open accounts with minimal balances that are paid responsibly look good on a credit report. This is even truer when the account has been open for a long period of time. This demonstrates a long credit history and looks favorable on a credit report.
Typically speaking, credit information stays on one’s report for only seven years, beginning with the date of last activity. As the account continues to be open, the date of last activity is updated to the current month. After a certain period of time that account and its valuable information will be removed from a credit report. If the account was properly taken care of and responsibly paid, then removing that information may be detrimental to one’s credit report. Do not throw away an impressive credit history.
