If you've got an old credit card (or multiple) that sits in your wallet but never gets touched, you've probably felt tempted a time or two to close it. If you aren't using the credit card, what's the point of having it, right? Not so fast! Did you know closing an unused credit card will have a direct impact on your credit score? And not a positive one.
Your credit score is made up of five factors, two of which would be directly impacted if you closed your credit card – Length of Credit History and Credit Utilization. Let's see how!
Length of Credit History
The length of your credit history, or how long you've been using the credit, accounts for 15% of your total FICO® Score. Your score is influenced by the average age of your credit accounts, so the older the account, the better. If you were to close one of your accounts, the average length of your credit history would be lower, especially if you close an old account. So, think again before you cancel that credit card!
Credit Utilization Ratio
Credit Utilization is a ratio of how much credit you're using to how much credit is available in total. As a rule of thumb, it's important to keep revolving credit accounts (such as a credit card) open and keep the balance below 30% of the credit limit. Credit utilization impacts your credit so heavily because it indicates to lenders how much of a risk you are as a borrower.
So, even if you rarely, if ever, utilize the available limit on your credit card(s), keep it open! You keep a low credit utilization ratio, raise your credit score, and prove to lenders that you are a trusted borrower. Keeping your unused credit card tucked away is doing more than you think!
If you still want to close the credit card anyway
It could be a smart idea to cancel a credit card when it's costing you too much money or hurting your credit score in other ways. Weighing the pros and cons can help you make the best choice for your financial situation. Before you close your card, check your credit report and check for any errors. You can order a free credit report every 12 months from each of the three credit bureaus (Equifax, Experian, and TransUnion) from www.AnnualCreditReport.com.
If you see any mistakes in your account history, such as payments mistakenly being reported as late or missed or payments being reported to the wrong account, you can file a dispute. The credit bureau has 30 days to review and respond to your dispute.
After you've closed the credit card, be sure to review your credit again and watch for errors. Once everything looks accurate and you've properly closed your account, it's safe to get rid of the card. Shred your card and make sure the sequence of numbers is unrecognizable.
