Since it’s a new year, I decided to take a good look into my credit card rewards program. I discovered that my rewards program, which offers rewards in many categories, is terrible in the category I care most about: statement credits. With a bit of research, I found a new credit card with cash back rewards that align very nicely with my spending patterns.
I went ahead and applied for a new credit card. And now I’m faced with a conundrum: what to do with my other credit cards. I have more than I’d like. I have two absolutely identical credit cards because one of them used to be a student credit card which was discontinued and the account was transferred to a new type of card, which happened to be identical to the other credit card I had. I also have obtained a few store credit cards over the years when I made large purchases and was tempted by the sign-up bonus. Assuming I’m approved for the new card, I will have six credit cards in all. The store credit cards are the ones I absolutely never use anymore, and am considering canceling.
When thinking about credit cards, there are two main factors to consider: your credit score, and any fees associated with the cards.
Credit Score Impact
The credit score is a mysterious beast, so I highly recommend that everyone educate themselves about what factors into your credit score. www.myfico.com offers very thorough information, and I even found some new tidbits I wasn’t aware of.
Your payment history represents 35% of your credit score. Most people are aware that this portion of your score factors in payments on various types of accounts, such as credit cards, car loans, and mortgage loans, and that missing or late payments will ding your score, and the effect will taper off over time. What surprised me was that one factor that goes into your payment history is the number of accounts that show no late or missed payments. According to the site, “a good track record on most of your credit accounts will increase your FICO® Score.” That would imply that if you have late or missed payments on one of your cards, you shouldn’t close another card for which you’ve never been late or missed a payment because that card may be helping boost your score.
This is what is often referred to as utilization. It makes up 30% of your credit score. This one is pretty easy to understand: if you have one credit card with a $10,000 limit and you’re carrying a balance of $8,000, that reflects poorly on your credit score because you’re already pushing your limit, so borrowers would consider you a high risk for a new line of credit or a loan. A tidbit that I didn’t know is that the number of accounts on which you’re carrying a balance matters. According to the site, “a larger number of accounts with amounts owed can indicate higher risk of over-extension.” This would imply that if you have multiple accounts with a balance, it may be a good idea to consolidate. A bit tangential from the topic of closing unused credit cards, but useful information nonetheless. More on topic, the site notes that “closing unused credit accounts that have zero balances and are in good standing will not raise your FICO® Score.” In fact, closing accounts can actually have a negative effect on your credit score because it lowers your total amount of credit, increasing your utilization percentage. Assume you have two credit cards each with a $5,000 limit and you’re carrying a balance of $1,000 on one of them. Your current utilization is 10%, but if you close the zero balance card, your utilization will go up to 20%.
Length of Credit History
This makes up 15% of your credit score, and is pretty easy to understand. Your length of credit history is not just the age of your oldest line of credit, though. It also takes into account the average age of your various credit accounts. Many people have heard the advice to not close their oldest credit card so as to maintain their length of credit history, but in fact, closing any card that is older than your average credit account could impact this portion of your score as well.
There are two other pieces that make up the rest of your credit score: new credit and types of credit used, but they’re less relevant to the topic at hand. From what we know now about your payment history, amounts owed, and length of credit history, it seems as though there’s nothing to gain from closing unused credit cards, and even a little to lose.
Credit Card Fees
The other important consideration is whether there are any fees associated with your unused credit cards. If you’re paying for an unused credit card, it’s a no-brainer: close the account. The problem is, how do you know if you’re paying for the card? This may seem like a silly question, as you would hopefully know if your card has an annual fee, but in recent years it’s become a real issue thanks to inactivity fees. Several banks have begun charging inactivity fees if you don’t reach a certain level of spending on your credit card over a period of time. If you’re not sure if your bank charges inactivity fees, call them up and find out. Also be sure to actually read all the documentation they send you informing you of changes to your account. That’s where they’ll let you know if they’re instating an inactivity fee.
If your card has an inactivity fee, you have a couple options. You could close the account to get rid of the fee, but that could damage your credit score, especially if the card has a high limit. Your other option is to use the card enough to avoid the inactivity fee. Here’s an easy way to achieve this: look at your primary credit card and see where its rewards are weakest. Pick something you purchase regularly in that category and designate your unused credit card as your source of payment for that recurring purchase. Maybe you order pizza for delivery every other week. Keep that credit card with the pizza menu and always use it when you phone in your order. If you can set up auto-payment for one of your bills on that credit card, that’s another great option.
So When Should You Close a Credit Card?
Everything seems to point to leaving your unused accounts open. Closing them can ding your credit score, and as long as you’re not paying any fees, you’re not losing anything by keeping them open. But should you leave your credit cards open forever, or is there ever a good time to close them? Here are some guidelines for when you should consider closing a credit card:
- If you can’t resist the temptation to spend. If having that credit card sitting around will entice you to spend money on frivolous things you don’t really need, I think it’s worth the ding in your credit score to remove the temptation.
- If managing all your accounts is too burdensome. Since monitoring unused cards for inactivity fees is crucial, if you have several cards with different institutions, it may be hard to keep track. This also could be worth the ding in your credit score if it eases the burden of monitoring several accounts.
- If you’re not planning on applying for a new line of credit or loan in the near future. Most people are focused on their credit score because it will help them get the best rate possible when they apply for a mortgage loan. But if you already own a house or aren’t planning on buying one, your credit score isn’t all that important. That’s not an open invitation to ruin your score, as potential employers may check it, but it does mean you don’t need to worry as much.
- If you can get an equal increase on the limit of your primary credit card. If you would like to close an unused credit card that has a limit of $5,000, call up your primary credit card provider and see if they’ll increase your limit by that amount. You might not get all of it, but you’ll likely be able to increase the limit at least a little. If you’re keeping a couple cards, you could get to the $5,000 mark through smaller increases on multiple accounts.
My first task will be to call up each of the companies and ask them if there are any fees associated with the cards. If not, I’ll update my address and have them start sending me communications by mail so I can monitor the accounts. I’m not planning on using any of the cards again, so if I do keep them open for now, I’ll probably close them after I buy a house. If there are fees, I’ll close the accounts now.