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
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.
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 with 0% APR 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. So now we had a reason to not cancel and one reason to cancel.
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.