We’ve all heard the warnings…don’t close your old credit cards because your credit scores will go down!
That warning is part truth and part myth. And, there are certainly times when you can safely close your credit cards without any negative impact to your credit scores, especially if you’re just tired of paying an annual fee.
Here’s the truth of the matter…The reason you’re being told that closing credit cards can lower your credit scores is because of the infamous “debt to limit” percentage that’s so important to your FICO and VantageScore credit scores. That’s certainly true.
One way the debt to limit percentage is determined is by adding up all of your credit card balances and all of your credit card credit limits and then dividing the total balances by the total credit limits. If you have unused credit cards, especially those with decent size credit limits, they’ll actually help to keep that percentage lower. It’s simple maths.
If you were to close a credit card or credit cards then you’ll lose the value of the unused credit limit and that can cause your debt to limit percentage to go up, and up considerably in some instances. The spike in the percentage will almost certainly cause your credit scores to go down. And because this percentage is so important the negative impact can be significant.
Now that you understand why your credit scores can go down when you close credit cards, let’s identify some scenarios where it’s perfectly benign to do so.
1. If you want to close a credit card that has a very low credit limit then the impact to your debt to limit percentage is likely going to be minimal or even immaterial. Secured credit cards, retail store credit cards and gasoline credit cards almost always have very low credit limits and can normally be closed without any score impact.
2. If you want to close a card that has a much higher credit limit then you’re taking a chance that your credit scores will go down. But, if you’ve got several credit cards with high limits and you close one or two then it’s still likely that your debt to limit percentage will be respectable thus making the closure either immaterial or relatively painless.
3. If you are closing a credit card because you opened a new one then it might be a wash or even in your favour. For example, if you close a card with a $1,000 credit limit and open one with a $5,000 limit then you’ve actually added $4,000 in unused credit limit to the debt to limit calculation. You’ll come out ahead with that one. Of course, if you replace a card that had a $5,000 limit with one that has a $1,000 then you’re subtracting $4,000 of credit limit from the debt to limit calculation.
NOTE: You may have read that if you do choose to close a credit card to choose one that is newer rather than older. There is a common myth floating around that if you close an old card your credit score can go down because you lose the value of the age of the card. That’s not true at all. As long as the account is still on your credit reports then you will always get the value of the age of the card. Point being…a 10 year old closed American Express card is still a 10 year old American Express card. And, bonus, the card continues to age on your credit reports even after it has been close. So, don’t worry about the age of the card when deciding whether or not to close it.
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