Should you close credit card accounts as a way to improve your credit score? In some situations, the answer is yes. Closing an account will not erase negative information about the account from your credit file. However, there may be other reasons to close credit card accounts. Here are some things to consider when deciding whether to close an account or keep it open.
(To learn about other ways to improve your credit, visit our Rebuilding & Improving Credit topic.)
Reasons to Close Credit Card Accounts
Here are some reasons why it might be a good idea to get rid of some of your credit cards.
- Creditors may be concerned if you have too many credit cards. (To learn more, see Improving Credit by Increasing Your Credit Limit on Credit Cards.)
- Limiting your credit accounts can also simplify your efforts to keep on top of your debt payments. Some studies show that consumers spend more if they use a credit card than if they pay in cash.
- Some credit cards have no grace period or such horrendous fees and interest rates that you may want to close them before more fees and charges accumulate.
- You can reduce the risk of loss or theft of credit cards by limiting the number you carry.
- It used to be that if you were delinquent on an account, and couldn't bring it current or negotiate a settlement, you were better off closing the account yourself, before the creditor did. Now, however, Experian says it doesn’t matter who closed the account – you or the creditor. But others still recommend that you make sure your credit report reflects that you (not the creditor) closed the account.
Reasons to Keep Credit Card Accounts Open
If you have an account with a high credit limit and no or only a low balance, closing the account will reduce your total credit limit, which can lower your credit score. Even if you close a card on which you have a high balance, if the card is not maxed out, closing it could lower your score. And if you have had the account for a very long time, closing it will decrease the average age of your credit history, which also lowers your credit score.
The Third Option: Keep the Card But Don’t Use It
If you think closing a credit card account will negatively impact your credit history (perhaps because it has no balance or a low balance, or you have had it a long time), and the card doesn’t have any fees that apply unless you use it, consider keeping the account open, but stop using the card. Use it seldom and pay it off during the grace period, before interest is added. (If you never use the card, eventually the creditor will close the account for nonuse.) If it has an outstanding balance, work at paying off the balance, but don’t use it for additional purchases or cash advances.
Closing a Credit Card Account That Has a Balance
If you do decide to close an account, you can do so even if you haven’t paid off the balance. The card issuer will close your account, and cancel your privileges. It may send you a bill for the outstanding balance, or send you monthly statements until you pay off your balance. Or contact the bank whose card you are keeping and ask it to transfer the balance on the account you are closing to an account you are keeping.
Which Credit Card Accounts to Close
If you decide to close some, but not all card accounts, here are some other ways to decide which to close:
If you pay your bill in full each month. If you don't don’t carry a balance on your cards, close the accounts with the highest annual fees. Make sure that the accounts you keep open have a grace period in which you can pay off your bill and not incur any interest.
If you carry a balance. If you don't pay off your monthly bill in full each month, close the accounts with the highest interest rates and shortest grace periods. Also, read the credit card company’s billing practice disclosures. How interest is calculated may make a big difference in how much interest you pay, even when different accounts charge the same interest rate.
To learn how to close a credit card the right way, see How to Close a Credit Card Account.
This is an excerpt from Credit Repair, by Margaret Reiter and Robin Leonard (Nolo).