• Should You Close Accounts?

    Should You Close Accounts?

    January 31, 2009

    Do you have a credit card or two that has no balance? Chances are yes. You have the card stashed somewhere and it is never in your purse or wallet. The questions is why keep this dormant account. You don’t plan on spending money on it and it just collects dust. You must consider the effects of closing this account will have on your credit score. There are two and they are listed below

    It is going to hurt your utilization.  This is the part of your credit score that judges how much you owe.  It is found by dividing your balances by your total credit limit.  Now, if you close this account, this means you will have less credit available, but you balances have not changed.  This means your utilization will go up.  This is a negative factor, you want a low utilization.  Having less credit available will  mean you will have to lower your balances to get the level of utilization you use to have.

    For example, if you have three credit cards one with a zero balance and a $2,000 limit, another with $1,000 balance and $2,000 limit, and  the third with $2,000 balance and a $5,000 limit.  Your utilization would be the sum of your balances, $4,000, divided by the sum of your credit limits,$9000 would be 44%.  If you close the first account with a $2,000 limit, you are now dividing the same balances, $4000 by a lower amount, $7,000.  This would put your credit card utilization at 57%.  And to get back down to where you were you would need to pay off  $900 to reach 44% again.

    It could hurt your credit history. Your credit score puts a weight of 15% on your credit history.  This is the average age of all your accounts and the age of your oldest account.  If you close an account without knowing how long you have had it, you could damage your credit history and your credit score.

    A common reason why people want to close an account is they have not used it in a long time.  They have got a new credit card and it gives them some perk or a better interest rate.  Their old card might be one of the first ones they signed up for and it carries no balance.  If you close this account your average age is going to go down for sure.  Even worse this card could be your oldest credit card account, if you close this account the next oldest will take its place.  This will have a double negative effect.  It will lower your average age of all your accounts and have a newer account take its place as your oldest account.

    You need to protect you oldest account.  It is OK not to have a balance, but use it once in a while.  This will avoid your credit card company closing the account becuase of lack of use.

    There are reasons to close an account.  If you lack control and closing the account is the only way to rein yourself back in, go for it.  If you have a low utilization and it is one of your newer accounts it could be alright.  This is not going to be the end of the world.

    The truth is know how long you have had an account.  Also, how much this could potentially effect your utilization.  Be Careful is the point.  You might not know what is your coldest account or what your utilization is.  Well, get a copy of your credit report.  On it you will find the balances on each account so you can do the math.  Also, you will find the date the account was opened.  You will then know for sure which account is the oldest.

    Was This Post Helpful?

    Help other people find. Vote you will be spreading the good will

User Comments

No comments yet.

RSS feed for comments on this post. or TrackBack URL

Leave a comment

CommentLuv badge