If you have read anything about how to get and keep a high credit score, you have probably seen this advice: never close your credit cards. This advice is true and good. Sort of.
The 2 parts of valid reasoning behind the idea of not closing any credit cards are:
1: Closing a credit card will decrease your debt utilization ratio. A whopping 30% of your credit score is calculated from your Amounts Owed. Your debt utilization ratio (your total revolving debt divided by your total credit limit) needs to be as low as possible in order to reap the maximum credit score. Closing a credit card takes away some of your total credit limit, which can raise this ratio, and lower your credit score.
2. Closing a credit card will impact your length of credit history. It’s a fact that the credit scoring model looks at how long a person has had credit established; the longer, the better. Closing a credit card you have had for many years may cause your length of credit history to decrease, which can result in a lower score.
So, there are valid reasons to not close your credit cards.
ADVICE: Never close a card that has a balance, your only credit card, or your oldest credit card!
But what if you have a ton of cards, are aiming to streamline your finances, and want to close some of them? Which ones can you close that will have minimal impact to your credit score?
If you have made the decision to close some of your credit cards, choose these (in this order):
Your newest card. The last credit card opened needs to be the first one to go. This card is not helping you very much with your length of credit history, so closing it should not have much impact on your credit score.
Your card with a zero balance. If you never use a particular piece of plastic, it is probably not figured into your credit score (credit lines must be used at least every 6 months in order to be factored into your credit score). Closing a card you never, ever use should have no impact on your credit score.
Your card with the worst terms. Big annual fees, high interest rates, and no perks give you no incentive to keep a card active.
You card with the lowest limit. A low limit credit card is probably having little effect on your debt utilization ratio. Closing low limit plastic can help limit your number of cards without great danger of credit score damage.
Closing credit cards doesn’t have to kill your credit score, just make sure you are choosing wisely.
Other points to remember are:
Always look at your debt utilization ratio before closing a credit card. If your ratio is going to be over 30%, don’t do it.
Always keep at least one credit card open and active, and pay the bill on time. This will give you points for managing credit wisely.
Always keep your oldest credit card open and active.
Take these tips to heart to ensure that whittling down your lines of credit has minimal impact on your credit score.
~~Susan McCullah is the Product Development Director for Data Facts, a 22 year old Memphis-based company that provides mortgage product and banking solutions to lenders nationwide