You’ve already heard everything that there is to know about improving your credit scores. Conventional wisdom says to pay all of your bills on time; don’t have too many cards ; have a good mix of credit types; and never, ever close any credit cards. That last isn’t always true though. I say that closing your credit cards can sometime raise your credit score.
If you use credit like the average American, the time will come when your shopping habits change and you decide to purge your wallet of unused plastic. This most often happens with department store or branded credit cards. Or perhaps you signed up for a card to get a 20% discount and you never use it anymore. You want to close the credit card, but your hands are tied because you don’t want your credit score to suffer a hit.
Yes, closing a credit card can adversely affect your credit score, but if done wisely, the impact might actually be a positive one.
When the credit agencies calculate your credit score, there are a number of different factors that are considered. Some of the major ones are:
- Length of your credit history
- The number of open credit lines
- Debt to available credit limit
- Your payment history
- Average age of your credit cards
The bullet point that we will pay attention to here is the final one: the average age of your credit card. The credit agencies basically look at all of your open credit cards to calculate the average age.
Consider for a minute the following examples.
- Our test subject, let’s call her Sandy, has a student credit card from 1997. The card terms are crap, but it’s her oldest credit card. Chase Bank offered a sweet new credit card with a nice 0% introductory rate that she would like to take advantage of. She applies and gets a new credit card in 2010. If she has no other cards, what is the average age of her credit cards?
The answer is 9.5 years.
- Once the 0% rate offer expires, test subject Sandy convinces Chase to offer her rate of 1.99% for another year. After the year is over the interest rate jumps to 13.99%. Knowing that she can get better offers from a competing bank, she drops the new card in the trash like last week’s leftovers. If she closes the card opened in 2010 and keeps the one opened in 2007 what is the average age of her credit cards if she has no other cards?
The answer is 16.
By closing the new credit card, I, uh, I mean she, has increased the average age of her credit cards by 6.5 years.
Here’s one rule to adhere to when closing credit cards: if you can, never close your oldest credit card. It doesn’t matter if it’s an old student card that you haven’t dusted off since Super Mario Brothers was the hottest video game in the stores. You don’t have to keep a balance on it, but make a purchase using that card once in a while to keep the bank happy.
One a side note, a trend that I’ve noticed is banks closing credit cards that card holders are not using or drastically reducing the available credit limit. They do this because they are not making money from you, and you are tying up available credit. They would rather transfer that credit card to someone else up to their eyeballs in debt who likes to hear the sweet sound of the cash register every time they swipe their credit cards.
Hang on to that grandparent of a credit card with a death grip because it will help to increase the average age of your credit cards.
One last thing. Don’t forget that the number of credit cards that you apply for also impacts your credit score. This is called a “hard inquiry”. Those inquiries will stay on your credit report for for two years, but the updated FICO scoring model, used by most lenders, only counts them during the first year. Also, if new credit applications are clustered together within a short-time period, the impact to your credit score will be minimized. If you will be dropping your newest card to get a better deal on another card please consider applying for a new card once the last inquiry has fallen off of your credit report.
As you see, you don’t always have to be held hostage by a credit card. Getting rid of a credit card really can positively impact your score if done wisely.