When Does Closing a Credit Card Make Sense?
Long story short, it rarely does.
I got the following question via the Mint.com Facebook page.
Question: "John, I have a question about credit cards. I have three cards: two Visas (NYSE:V) and one American Express (NYSE:AXP). I've been thinking lately that there really is no need for two Visa cards and that maybe it hurts me to have that much credit open (available).
"Should I consider closing one? If so, does that delete the excellent credit history on that card?"
Answer: Excellent question. There's far too much bad advice floating around on the Internet when it comes to credit cards, credit reports, and credit scores. This post won't add to that.
Long story short…I wouldn't close any of them.
The 10-Year Rule
First off, good information (non-derogatory) can remain on a credit report indefinitely. There is no law that requires the credit reporting agencies to remove the good stuff, ever.
Having said that, they will eventually remove closed and inactive accounts after 10 years as a matter of policy, rather than as a matter of law.
When an account is removed from your credit report, you lose the value of the age of that account in your credit score. But the fact that the closed card will persist for 10 more years after the closing should put your worries to rest.
By the time that card is removed from your report, everything else on your credit report will be 10 years older.
The primary reason you should consider leaving them open is the impact closing one would have on your utilization percentage. This is the relationship between your credit card balances and your credit card limits expressed as a percentage.
If your balances are too close to your credit limits, that's no good for your scores. I've written about how to calculate that percentage for Mint in the past, here.
While your cards are open, you are benefiting from the unused credit limit on your unused or underused Visa accounts.
For example, if you carry a balance of $1,000 on your Visa that has a $2,000 limit and a $0 balance on your other Visa that has a $2,000 limit, then you're 25% utilized ($1,000 balance divided by $4,000 limit).
If you were to close the second Visa, then you'd have to remove the $2,000 limit from the equation. So, now it would look like this: $1,000 balance divided by $2,000 = 50% utilization, which is much worse than 25%.
I wouldn't go into paralysis over this. If you want to close a card, then close a card. Just be aware that by doing so, you may lower your credit scores.
Of course, if you maintain low balances on your credit cards or, better yet, no balances, then the closure would likely be benign.
Also, some people suggest closing cards that you're not using as a fraud prevention measurement. I disagree with that advice.
If you're not using a card and you don't plan on using it, then just run it through the shredder and it's practically impossible for the account to be abused.
And, if monkeys begin to fly and your card is compromised, then the Fair Credit Billing Act limits your liability to no more than $50, and most credit card issuers won't even ask you for that amount.
Point being, closing the account does infinitely more to protect the credit card issuer than it does to protect you.Editor's Note: This article by John Ulzheimer was originally published on MintLife.
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