Credit Myth: Closing Old Credit Card Accounts will Raise my Credit Score

This month we will explore the myth that closing unused credit card accounts will help your credit score, when in fact many times the opposite is true.

People often ask me when we look over their credit report if they should close credit card accounts they are not using.  The answer usually depends on the rest of their credit profile.  Unfortunately this question does not have a one-size-fits-all answer.

Intuitively we think that the less debt we have, the more credit worthy we are, less of a risk.  Unfortunately, our credit score actually rewards the responsible management of debt over time, not a lack of it.  So, closing accounts not being utilized could have a negative impact on our credit score in two ways, by shortening our credit history and by increasing the percentage of debt currently utilized.

The third most important criteria when calculating a credit score is the credit history, how long the accounts have been open.  By closing an account that is older than other accounts we essentially shorten our credit history.  If some accounts must be closed to help you sleep at night, start with the ones that have been opened for the shortest period of time.

A second impact closing accounts could have on your score is an increase in your debt utilization ratio.  Almost a third of your credit score, 30%, is based on amounts owed on your current debt.  Let’s say that you have two credit cards each with a limit of $500 for a total available credit of $1,000.  Now let’s also say that one of your cards has a balance of $250 on it so you have utilized 25% of your available credit.  Now if you close the card that doesn’t have the balance, this leaves you with only $500 total available credit and your debt utilization ratio has jumped up to 50%!  The lower your debt utilization ratio, the better the score.

You may still want to close some accounts to help you sleep better at night or because you know that having the available credit means you will use it.  If so, close those old accounts carefully. 

If you are looking for more help with your specific credit questions, we have access to software that allows us to change/update information in your credit report and see how this would impact your scores.  Please give us a call at Resident Lending Group if this service would be helpful to you.

Building relationships with our clients to provide successful home ownerships.