Yesterday, Hidden Credit Repair Secrets posted the above credit score advice on our Facebook page. He suggested that closing old credit accounts could negatively affect your credit score so you shouldn’t do it. While there’s nothing necessarily incorrect about this advice, like most things, it’s not quite that simple. And sometimes it’s advice like this leads to a misunderstandings about credit scores and results in irresponsible practices for what amounts to minimal gain.
Understanding what credit scores are looking for and how they are calculated (like length of debt history) can help you understand why and how much closing an older account can hurt you. It will also empower you to make more well informed decisions about your credit and can even help minimize any negative effects of otherwise harmless credit account decisions.
FICO score calculation:
- 35% Debt History
- 30% Debt level*
- 15% Length of Debt History*
- 10% New Debt
- 10% Type of Debt
*Can be effected when you cancel a credit account.
Credit limit vs. utilization
Let’s take on the second part of the advice first, because it’s a bit simpler to understand and can have a more direct impact on your credit score:
“If you close a 10 year credit card account with a nice limit…your overall available credit will decrease, which will also drop your score.”
It’s not the available credit that’s important, it’s the ratio of outstanding debt in relation to your overall available credit that credit scores use. It’s recommended to keep your credit utilization under 30% of your available credit with an optimal rate under 10%. The lower the better.
In other words, a person who keeps no outstanding balance on their credit cards has nothing to worry about. For others, suddenly losing a chunk of available credit can increase the ratio and hurt your score. Here’s an example:
Dave has 2 active credit card accounts, each with a limit of $10,000 ($20,000 total); one card has no balance, the other has a balance of $5,000. That means the current utilization is 25%, which is not bad. But if suddenly Dave cancels the first card, his utilization jumps to 50%, which is bad. But even if Dave pays off the debt, he now has less leeway for utilizing credit without hurting his score (about $3000).
If consolidating cards is the intention, getting the one account to increase your available credit for closing out the other is ideal (banks will do this). Adding another new card to regain more available credit would only lower your ‘new debt’ part of the score as well. If you do decide to close out a credit account and don’t get the adjusted credit offer, keep a lower balance of debt or your credit score may suffer.
Still the effect is minimal for those with good to excellent credit. This is much more of a concern for those who are trying to repair a poor credit history.
Length of debt history
Now for the first part of the advice, which is usually why it’s suggested to keep older credit accounts active: length of your debt history (15% of your FICO score).
“If you close a 10 year credit card account with a nice limit…your overall length of credit will decrease, which will drop your credit score…”
When you close a credit account, it stays on your credit reports. For some agencies, it stays longer than others. According to Experian:
A closed account with no negative information in its history will be deleted 10 years from the date it is closed. A closed account with late payments in its history will be deleted seven years from the original delinquency date of the account.
In other words, even if you closed your oldest account, you still have 10 years before it’s removed from your credit report. 10 years is a long time to continue to build credit. In fact, because you can have a nearly perfect credit score with 10 years of credit history, getting rid of an old account probably won’t hurt you much if you continue to build a positive credit history in that time.
Credit scores are more interested in your most recent activity. Activity older than 10 years isn’t of much use to creditors, so even with the length of debt history part of the score, such accounts will offer minimal gain (if any at all). And if there are blemishes on the account, it’s usually better to get it off your credit reports.
It’s not just your longest running account that’s taken into account, however. Average age, and how recent the activity is also part of the calculation. In other words, even if you hold on to an old credit card, if it’s never used, it isn’t helping much. Also, the more old accounts you have on your report, the more stable your average age will be if you remove one.
Other things to consider:
Why are you canceling the account?
It’s probably not worth a second thought about the minimal potential damages to your credit score 10 years down the road if, for example, your credit card suddenly charges you a monthly fee or you’re otherwise looking for a better offer. And even if you’re just trying to simplify your life by consolidating credit cards to a single account, you might never feel any negative effects, so it may not be worth keeping account(s) open just for the sake of keeping an account open.
“Paid, Closed/Never Late” account status helps your credit standing
Having paid/closed accounts isn’t just good, it’s something that’s actually expected to show up for anyone who is responsible with debt and has been utilizing credit for some time. Sure, you need to have open accounts currently in use as well, but closing accounts doesn’t actually “hurt” your credit history for 10 years. Until then, it actually helps.
Old accounts can sometimes be a liability
Having multiple credit cards can be a pain to manage. Even if you don’t use the account, you need to be sure the terms don’t change or strange charges appear on your card. If you don’t manage these things and they happen, it can be a much larger problem for your credit rating than closing the account could ever be.
What’s your credit history like?
If you have little history or have a shaky credit past with a number of blemishes, it may (in fact) be wise to keep older accounts. Losing what little positive history you have can then be the difference between getting a loan and not. If you have a robust, diverse credit history with few negative marks, you have little to worry about and any negative effects on your credit score will likely be negligible.