Can closing an inactive or rarely used credit card account improve your credit score? No, but being more careful with your open accounts will, and only if you’re making your payments on time and using a small amount of your available credit, according to this article from U.S. News.
If you have a hodgepodge of credit cards tucked inside your wallet, including several you don’t use, you might want to close a few. But before breaking the news to your issuer, make sure that canceling is really your best option.
Closing cards can hurt your credit, but how much damage it does depends on several factors, including credit limits, account ages and the statuses of your other accounts. If you’re selective about the cards you cancel, you can minimize the impact to your credit while getting the most value out of your plastic.
Here’s your guide to which credit cards you should consider closing, and which are best left open.
For example, should you keep or close a card with an annual fee that you never use? The travel rewards you earned on this card once got you a first-class, round-trip international flight, but you haven’t actually purchased anything with it for years. You kick yourself every year you pay the $100 annual fee.
Action: Cancel or convert. If you don’t use your annual fee card, it’s generally not worth shelling out over $100 a year for it. But keep in mind that closing the account may affect your FICO credit scores in the following ways:
Amounts owed – 30 percent of your score. Your total amounts owed is determined in part by how many accounts you have with balances, how much you owe on outstanding loans and your credit utilization ratio, or the percentage of available revolving credit you’re using. The lower your amounts owed, the better. Say you have three cards, each with a $10,000 limit, and a total of $5,000 of debt over two of them. Your credit utilization ratio would be around 17 percent with all accounts open, but if you close the card without a balance, that could go up to 25 percent, hurting your credit. A good rule of thumb is to stay below 20 percent.
Length of credit history – 15 percent of your score. This is calculated by the age of your oldest and newest accounts, and the average age of all your accounts. If you close your oldest account, or if you often open new accounts, your scores could take a hit.
Types of credit in use – 10 percent of your score. Closing accounts could limit the different types of credit you have in use (installment loans, credit cards, etc.) and decrease the number of accounts you have open, ultimately contributing to a small drop in your credit scores.
Cancel your annual fee card, and the biggest impact it will likely have on your credit is driving up the amount of available credit you’re using. If you’re carrying high balances on your other cards, consider paying them off to minimize the hit to your credit upon cancellation.
Closing your card may not be the only option, though. Before making the move, call your issuer and ask if you can convert to a no-fee credit card, or a card that suits your spending needs.
Switching to a card with less strict underwriting standards generally won’t trigger a hard inquiry on your credit, but it could trigger a soft inquiry. A hard pull could make your scores dip about five points temporarily, according to myFICO.com, but a soft one won’t affect your scores. With the conversion, you’ll be able to keep your account number and history in most cases, sparing your length of credit history.
