Don't Close Credit-Card Accounts

Would closing old credit-card accounts ever help my credit score?

No. "You're never going to see an increase in your credit score from closing a credit card," says Emily Davidson of Credit.com.

There are two key reasons why closing old credit-card accounts can hurt your credit score: The move affects your credit utilization ratio and your credit history.

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A key factor in your credit score is the amount of available credit that you've used, called your "utilization ratio." Generally, the lower the ratio, the better.

The credit score looks at the amount of available credit you've used on each card, but the more important number is the total across all of your cards. This ratio goes up whenever you close any accounts.

For example, if your balance is $10,000 and your credit limits total $50,000, your ratio will be 20%. But if you close a card with a $20,000 limit, your ratio will jump to 33%. And it's the amount that you've charged that counts -- not how much you pay off. So you can have a high utilization ratio even if you always pay your bill in full.

"It's easy to do the math before you close the account to see where you stand," says Davidson. You'll get the most points for your credit score by keeping your ratio below 10%, says Davidson. But keeping it below 20% can help, too.

You won't get extra points for keeping it much less than 10%, however, and you always want to keep it above 0% to show that you can manage credit. Keep the ratio just below 10% for several months before you take out a big loan, which gives the credit-card companies enough time to report your level to the credit bureaus.

It's also helpful to keep open old cards because they show a good history of managing credit. "Credit scores love to have old, established accounts that have been there for a long time," says Davidson. You can't erase bad credit history by closing out the account (bad history stays on your credit report for up to seven years), but it can hurt your good history.

One element of your credit score is based on the age of your oldest card. Closing out the oldest card can bump your score into a new age range. And the score also looks at the average age of your credit cards. Closing out any of your old cards can shorten the average age. "You don't want to close the oldest card, or even the older ones," says Davidson.

If you really want to close old cards -- because you have a tough time keeping track of them, for example, or you worry about identity theft -- focus only on newer cards, and close the accounts in moderation. "Close one and see what happens, then close another and see what happens," says Davidson. "I wouldn't close five or six cards at once."

And don't close any cards within six months of applying for a big loan. "We hear about people who are about to buy a house and closed a lot of their credit cards," because they think they're cleaning up their credit, says Davidson. "That's the worst possible time to do that."

For more information about improving your credit score, see Demystifying Your Credit Score.