It’s one of the most common myths related to credit scoring…close credit card accounts if you’re not using them because it will improve your scores. This is one of the fallacies of credit scores that many don’t understand. It may seem logical to cancel accounts you don’t use or want. Unfortunately, credit scores don’t work the way we think they should. Closing an account impacts one of the most important categories that contribute to a credit score – debt burden, which counts for 30 percent of your score.
Utilization Percentage
This category, debt burden, represents 30 percent of your score. By closing a credit card account, you reduce your available credit by the amount of the card’s credit limit (there are some exceptions to this rule). The impact on your credit score depends upon the total of the credit limits on your other credit cards and the amounts you owe. For example, if your total credit limit is $6,000 and you owe $2,000, you have used 33% (2,000/6,000 x 100) of your credit card. If you close an account with a credit limit of 2,000, your credit limit is now $4,000 ($6,000 – $2,000) and you have used 50% of your credit ($2,000/$4,000 x 100). This can have an impact on your score. The ideal percentage is below 10%.
This is simple math and closing an account with a very low credit limit may not have too much of an impact. And, if you have very low balances on other cards…again, there may not be too much of an impact.
Don’t Worry About The Length of Credit History Measurements – MYTH BUSTER
Let’s look at the length of your credit history. This category represents 15 percent of your credit score. It’s commonly reported that if you close an old credit card account you lose the value of that age of that card. That is incorrect. In fact, all accounts on your report are considered for age metrics regardless of whether they’re open, closed, active or inactive. Point being, don’t choose to not close an account because of the account’s age.
If you don’t need the account, aren’t paying any annual fee, and don’t have a balance, just use it every few months to keep it active. Charge a small amount on it and pay it in full. If you can’t resist using the account, put it away so you can’t use it or run the card through the shredder.
Credit Reporting Expert, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. Follow him on Twitter here.