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Think Twice Before Canceling Credit Cards

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Before you cancel your credit cards, think twice about how it might affect your credit score. I made this mistake about two years ago when I canceled a card I had for over 8 years. Why did I cancel it? Because I hadn’t used it for 5 years, it wasn’t a rewards card like my new credit card, and I didn’t think it would affect my credit score. But canceling that card actually had a negative affect on my credit score! Thankfully, I already had a good credit score and wasn’t planning on applying for any lines of credit at the time. But the story may be different for your situation.

Age of Credit is part of your credit score

Canceling credit cards can hurt your credit score!

Canceling credit cards can hurt your credit score!

At the time, I didn’t know how credit scores are determined. I thought that since I had an open line of credit that wasn’t being used, it would lower my credit score (too much available credit can be a bad thing). That was partially true, but I didn’t realize that the age of your credit history also affected your credit score.

That line of credit was open for 8 years, had a $1,000 limit, and I was never late or missed a payment. Besides that card, my newest lines of credit were another credit card and a car note, both of which were about a year old. Canceling that credit card reduced my average age of credit quite a bit, and there was no substantial benefit by reducing my line of credit by $1,000.

This chart breaks down the components of your FICO score.

credit-score-breakdown.png

Credit Score Components

As you can see by the above chart, making any drastic changes to any of the categories can affect your credit score. This would include missing payments, raising your credit utilization, canceling cards and reducing the length of your credit history, taking out new credit cards, and taking out different forms of credit (mortgages, store brand credit cards, student loans, etc.).

Now I think it through before making moves that will affect my credit score

Recently, my wife received a new Discover Card to replace an expired card, but she forgot she even had this particular card in her name! It turns out she used the card when she lived with her parents and even though she hadn’t used the card for several years, it was still active. We looked into it a little bit, and it turned out she had a $15,000 limit on it. Add that credit limit to another Discover Card, a credit card through our bank, and a mortgage in her name (she bought the house before we were married and I was never added to the mortgage), and we found out she has a lot of available credit to her name! Time to reduce the amount of credit to improve her score!

We called customer service to cancel the card and while we were going through the process, I remembered that we shouldn’t cancel the card because your length of credit history affects your score. This card was about 12 years old, which is a very good age to keep on your credit.

Well, it turns out credit card companies don’t like to lose customers, so they transferred us to a CSR intent on keeping us as customers. In the end, we kept the card open and had it switched to another Discover card which offers great rewards benefits. The Discover Card rep offered to lower the credit limit to $1,000, which is the minimum line of credit you can have. This helped lower her available credit limit and should help improve her credit score. In the end, it worked out for both parties. :)

I need to look up our credit scores

Now I have a confession. I don’t know my credit score (or my wife’s). The last time I checked was a couple years ago when I bought my car. My wife hasn’t checked hers in about the same amount of time, when she got a mortgage.

One of the reasons I’ve written about credit scores so often lately is because I knew I needed to check ours, and I was interested in learning about it. I figured I might as well share what I learned. Now I just need to go get my free credit score. I’ll share more about this later. :)


Published or updated January 1, 2013.
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{ 29 comments… read them below or add one }

1 Pete @ biblemoneymatters

I’ve got a good credit score, and i’ve only got two open credit cards. Granted, they’ve both been open for probably 6-10 years. I was thinking about canceling one of them, and probably will. At this point for me I can’t even think of a good reason to keep it open. It may hurt my credit score a little bit, but at this point I’m not sure i care that much. We own both our cars, we own our house, and we can’t conceive of needing to use credit any time in the near future. We pay cash for everything now, and we’ve got 6 months of expenses in our high yield savings account.

The credit score in my opinion is more important for people who plan on taking out more loans in the near future, and I’m not planning on doing that.

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2 Ryan

Blaine,

I’ve canceled a couple other unused cards as well, but I wish I hadn’t closed the card I did because that was my longest running line of credit. I don’ think it will hurt me in the long run though.

Pete,

In your situation, it probably won’t hurt to close a card. You seem to have a handle on your finances. I do recommend keeping at least one card though, for emergencies or rewards. Another option is to keep a line open instead of closing it, but have the limit reduced to the lowest possible. Either way, with no outstanding debt and a clean history, your credit score is probably very good.

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3 Blaine Moore

I haven’t canceled my longest standing (or my wife’s longest standing) credit cards for just that reason. We never use them, but they give our credits a nice long history.

I am in the process of canceling some unnecessary cards that we’ve only had for 4 or 5 years, though. For example, we switched our insurance companies and no longer need the “rewards” card that we were using to pay our insurance through.

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4 Ken

Great piece of advice. To illustrate the point we ran a correlation of credit scores by the age of our users and you can clearly see that younger people have lower scores on average. The result support that the age of your credit lines is an important factor is credit scores. Take a look:

http://blog.creditkarma.com/credit-scores/relationship-between-age-and-credit-scores/

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5 Ann-Marie @ Quizzle

Great post! Like you, I too discovered the hard way that closing credit card accounts will not help my credit score. It seemed logical that closing an account I don’t use would be the responsible thing to do, but not so, as far as the credit score algorithms would have it.

Another reason that closing cards can be a bad idea is that you’re lowering the amount of credit available to you (total of your credit limits) and depending on the amount of debt you continue to carry, this can look like you’re overextending yourself. It can be a bit confusing, but it has to do the “amounts owed” portion of your score, which accounts for roughly 30%. I just wrote a blog entry about this if you’re looking for more info: http://tinyurl.com/4p6slg

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6 Jesse

Hey Ryan I cant second this enough. My fiance has basically a perfect credit history. The only thing that she is consistently dinged on is length of credit history and she has 5 years of it. Considering she is 25, thats not that short a history, but short enough to where closing any of her long running accounts could absolutely hurt her credit badly.

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7 Dividend Growth Investor

Ryan,

You might need to check not only your credit score, but your credit report as well. I applied for a credit card once, never got it ( someone might have “checked” my mail for me, if you know what I am saying), then called the company and thought I had cancelled it. I checked my credit report one year later and I did see the credit card. After 2 hours on the phone I managed to cancel it. :-(

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8 Ryan

Jarhead,

Lowering your available credit can be a good thing if you have too much credit available, but it can also be bad if you have outstanding debt because it raises your utilization rate. The lower the utilization rate the better. Ideally you want zero%, but a rate of 30% or lower isn’t too bad.

Canceling a 10 year old line of credit can hurt a little, especially if your other lines of credit are relatively new. The “average age of credit” is taken into account in the FICO scores.

Keep plugging away and your scores will continue to rise.

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9 Jarhead

I recently had one of my longtime cards closed by the store (Sears) because of lack of use, I hadn’t used it in over 10 years. So this is going to hurt a score that isn’t great right now to begin with because it is a long account as well as lowering the available credit. One day I will be alright though.

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10 Cedric Canierro

when i learned about the credit history thing, i started not to close my unused credit cards, i just hope that this do good to me

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11 think outside the piggy bank

Too much available credit can be a bad thing? I had no idea! In fact, I had assumed the opposite. As in, the more available, the more it shows you’re responsible and not running up debt. I live in Canada, but I imagine the same thing would apply here. Thanks for the info.

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12 Richard

Would you mind telling how much it dropped your score, if you know? I’ve got a card I’m not using that I’ve been thinking about closing, but I’d love to be able to estimate how much it’s going to hurt me.

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13 Ryan

Richard, I don’t know exactly how much more score dropped, but average length of credit history accounts for 15% of your score. Since this was my longest tenured card, it substantially dropped the average age of my credit. As for how much it will drop your score, I have no idea. For older cards, many people recommend just dropping the limit as low as you can and keeping the card open. If the card you are thinking about closing is not your oldest card, then it won’t matter as much.

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14 Ryan

Think Outside, Yes, too much available credit can be a bad thing, especially if your debt to income ratio is high. Even if your debt to income ratio isn’t high, then it means you have a lot of available credit and could go charge up a lot of debt in a short period of time and leave your creditors stuck with the bill. It’s a fine balance!

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15 Mark @ TheLocoMono

One thing people can do is purchase their credit score once a year at a certain time each year (after they pay off their credit card debt) and see how the score has increased or decreased and figure out why that happend.

Even though I closed my credit card accounts years ago, I found that as a result of my secured credit card last year, my score jumped which is good for me.

I would say that it is better to have one card than multiple cards, even if you don’t use it, but inactivity can hurt your score because you are not using it so even $100 a month, say your phone bill, charge it to the card and send the payment to your card before the end of the billing cycle would help show good payment history.

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16 Richard

Richard, I closed a balance-transfer card earlier this year and a few months later my score was up 70 points – but I was also reducing the amount of credit I use. I had last checked my score shortly after getting the card, and paid off about 50% of the available credit on that card right before closing it so I definitely made some progress on the amount owed. I still have two older cards so closing the account would have increased the average age.

It would be interesting to know what levels of credit can be dangerous for your score – I want to keep things clean so I can get a mortgage in the next year or two but I’m thinking about getting a bigger line of credit for business. I know my total credit would be less than half my (current) annual income so that shouldn’t be too risky. As long as I don’t use it all and pay 19% interest on it for years :)

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17 Pinyo

I think I did the same mistake you did and canceled a few unused credit cards because they are either store credit cards or provide no reward. I am not sure if I took a hit, I think I did.

I can’t tell you my credit score either, but the last time I checked my credit report, everything looks good.

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18 Fizzle

Very interesting.
I just started using CC’s late last yr, and hav had my limit jump substancially since starting with X credit card company.
I applied for and got approved for a credit card with Y credit card company, that has a greater credit limit.
I always pay my cards on time and in full.
I am considering closing my credit card from X company because they increased the APR (doesnt really matter to me), it has no rewards, and I dont want to hav too many credit cards with me.
Will this ding my credit score? I’ve had the card for about 8 months or so…

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19 Ryan

Fizzle: Here is an article I wrote about closing credit cards and how it will affect your score: Think Twice Before Canceling Credit Cards. You can also consider asking the credit card company to change your card to a rewards card so you can earn cash back (preferred) or points.

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20 Fizzle

Thanks for your reply Ryan. I read the article and it was very informative.
I was just wondering if closing the older credit card will ding my credit score much, since i’ve only started using credit cards, and just got the card for a relatively short time (about 7 months). I will def. look into asking the credit company to change my card type to earn rewards.

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21 Florida

Why is Chase Credit Card company so quick to cancel your card upon your request. I had a card for 10 years and cancelled it due to their refusal to remove a late fee.

I guess whatever the customer needs to do to get you off the phone.

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22 Eunice

I have a problem that I hope someone can help me with. I have in total, 10 credit cards, but I’m pretty sure that I have a good credit score because I make my payments in full and on time every time. 10 credit cards… yea I know. But in my defense, 8 of these credit cards are department store cards (Nordstrom, Macys, etc) and I only opened them to get the sign-up discounts. I probably only use the Nordstrom and Macys credit cards now and then, but only because I feel like I shouldn’t leave them inactive. But as for the rest of the cards… I don’t really use them because it’s not like I shop at those specific stores all the time and even when I do, I forget and use my debit card instead. The two major credit cards that I use is my Wells Fargo one and my Chase South West card, which I use the most because of the points. So now I am in a pickle. I really just want to stick with one credit card, but I have the other 9 looming over me. I don’t want the credit card companies to close my accounts because my cards go inactive because I know that will hurt my FICO score. But I don’t want to cancel my cards because I know THAT will hurt my score as well. It’s like… there’s no win-win situation. What the heck should I do?!?!?

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23 Peachy

Eunice, depending how long you’ve had your 10 cc’s, I would suggest that if the inactive ones are less than 3-4 years old, it would be ok to cancel them, and just keep the 6 with some seniority. Like some of the older posts have suggested, you can always set up a monthly re-occurring payment of bills or what not on each of the cards you decide to keep. Downsizing from 10 to 1 card is a bit drastic. Good Luck!

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24 Brian

About 4 years ago (in my not so smart days), I went over the limit a few times on my first credit card. Recently, i accidently used that same card for the wrong large purchase and went over the limit again by about 30 dollars. How negatively does this affect my score?

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25 Ryan

Brian, Assuming this is the first transgression in 4 years it probably shouldn’t affect your score much at all. You may even be able to call your credit card company and ask them to remove the penalty and over the limit occurrence from your credit record. The key is to make sure it doesn’t happen again, so be sure to monitor your balances.

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26 Jen

Recently I had to close or cancel my AT&T credit card. I received a letter from AT&T stating that I will be charge $60 per year for their credit card and if I spend over $2,000 the $60.00 will be waived. Do you believe the nerves of these people. I have been a customer since 1999, however, I have not been using the card as frequently as they would like. I knew this would affect my credit, but I had no choice considering I am unemployed. I have excellent credit. How badly will this affect my credit?

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27 Ryan

Jen, it depends on several factors, the most important of which are your average age of credit and your credit utilization. You will be closing a card that has been open for over 10 years, which will reduce your average age of credit, and you will also close a line of credit, which could affect your credit utilization (amount of credit used vs. amount of available credit). For example, if you have $5,000 debt and have credit lines equal to $50,000, your credit utilization is 10%. If you close an account with a $10,000 line of credit, you now have $5,000 debt on $40,000 available credit, increasing your utilization to 12.5%. The lower your utilization rate the better. Overall, it would be impossible for me to give you a number regarding how your score will be affected, but if you have other lines of credit and don’t have a lot of debt, the change most likely will not be substantial. If you are curious, you can check your score now, then again in a few months. Best of luck in finding new work!

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28 JAMES

I HAVE A 10,00 SECURED CREDIT CARD WITH BOA I HAVE HAD FOR 4YRS. I ALSO NOW HAVE A NOTHER SECURED CARD THREW WELS FAGO FOR 6,500 I HAE HAD FOR 6 MONTHS AND A UNSECURED CARD FOR 2 GRAND TREW CHASE BACK FOR 1 YEAR. ( I ALWAYS PAY OFF THE BALANCES ON ALL CARDS EARLY! AND MY DEPT TO CREDIT RATIO IS LOW, I DONT SPEND MORE THEN 1,000 A MONTH ON CREDIT CARDS….AVERAGE IS 300!!!)
I ASKED BOA IF THEY COULD GRADUWATE MY SECURED CARD TO A NONSECURED CARD BUT SINCE HOW MY INCOME IS ONLY 800 A MONTH, THEY SAID NO, ALSO SAID ILL NEVER WILL GET A 10 GRAND UNSECRED CARD WITH PAY THAT LOW AND RECOMENED ON LOWERIG MY CREDIT LINE….BUT WILL NOT THAT HURT MY CREDIT SOCORE????ANY ADVICE? THANK YOU.

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29 Ryan

James, if they didn’t require you to lower your balance, then it’s not necessary. Just be sure you never charge more than you can pay each month. You can also try upgrading one of your secured cards from Wells Fargo or Chase. Best of luck.

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