Should You Keep or Close Credit Accounts to Keep/Get Your Credit Score High?

There seems to be a lot of contradictory information about credit accounts and whether or not closing one has a good or bad impact on your credit score. Bankrate weighs in on this issue and tells us why the answer isn't clear one way or the other. They start with the reasons to keep the accounts open:

Keeping the accounts open helps maintain a low ratio between outstanding balances and available credit lines -- that's called the credit utilization ratio. Not bumping up against your credit limits shows you're not running out of available credit. Lenders like borrowers who aren't desperate.

The length of time the account has been open also influences your credit score. Having a clean payment history on an account with a 10-year history is more valuable to your credit score than a clean payment history on an account that you've only had for a year or two.

And here are the reasons to close certain accounts:

On the other hand, every open credit line is a commitment by a lender to loan you money. A lender considering a credit application is going to look at those open lines as potential loans that can demand a part of your income. That's money that won't be available for their loan payment.

And they end with some fairly specific advice:

In the short-term, it's a bad idea to close accounts in an attempt to improve your credit score. Longer term, managing your credit accounts is a part of managing credit. Not holding on to cards with annual fees or cards with high interest rates can make sense.

There's no magic number of credit cards you can have before it starts to hurt your credit score. By pruning away some of the unused accounts, you can free up space for a new card.

My advice is for you to review your credit reports and get a handle on the number, age and credit limits of your open accounts. If your credit is in good shape (a score in the mid- to upper 700s or higher) and you don't have any immediate plans to apply for credit, feel free to cancel a credit card or two. Choose cards recently issued or those with lousy credit terms. Wait a year before repeating this process.

A few thoughts from me on this information:

1. "Not holding on to cards with annual fees or cards with high interest rates can make sense." CAN make sense? How about DOES make sense?

2. I only carry/use two credit cards anyway. I could earn a bit more rewards if I carried more but for me the hassle just isn't worth it.

3. One of my New Year's resolutions is to check my credit score. I'm betting I'm in the mid- to upper 700s, but I'm not sure.

Comments

[JimmyDaGeek]

Why not send everyone to the people that create the FICO score, http://www.myfico.com/CreditEducation/, for their take on things?

[Pete]

I posted on this topic yesterday - things to do to improve your credit in 2008- and this was one of them suggested by MSN money - closing open accounts with bad terms, but also keeping enough open to show that you can manage your credit, and show that you can make payments on time.

[beastlike]

Hmmm, not exactly sure what's best in this case. However, I lowered the max on both my CC's a while back and saw my score take a LARGE hit. It went from 790's to 750's even though I was paying both car payments on time and the mortgage. The only thing I did was lower the CC max from about 20k to 6k, I guess the credit utilization number is huge. Since then I raised them back, but haven't checked my # since.....

[F. Morana]

"Bad terms / good terms" is not quite so simple an issue -- in this respect, banks are just like hotels, furniture stores, and car dealers. That is, if you push for a favorable deal, you can get it. Sometimes the banks offer favorable deals outright, through the mail, and at all times, you might be able to place a cold call & receive a favorable deal on the spot. By favorable deal, I mean something like a 0%-4% for a specified short-term period, or a competitive fixed-rate loan, in either case involving reasonable transaction fees & reasonable minimum monthly payments.

So my take is that, if you feel that there is at least the potentiality for obtaining a good deal from your credit card issuer, then it makes sense to keep the account. But if your credit card issuer is hard-nosed or deceptive in its practices, then there is little point in keeping the account.

[F. Morana]

May I add an afterword as to what I mean by "deceptive."

A year or two ago, I received a circular from the very largest of the U.S. banks, boldly offering "zero percent thru February 2008." But upon examination of the fine print, there was a disclaimer: "We can change this rate at any time, for any reason, including for reasons having to do with our own market competitiveness."

In other words, I could accept this offer, pay hundreds of dollars in non-refundable transaction fees, and then have them rescind the rate a day later!

What was deceptive here was the use of the phrase "thru February 2008." If a rate can be rescinded for any reason, then the phrase "thru February 2008" is meaningless, as one could just as soon say "thru February 2099," or "thru February 2999."

I regret that I did not refer this to the appropriate regulatory offices.

[Amy]

When I first met my husband he had never owned a credit card (at age 24). Good for the lack of debt, but bad for the lack of credit history. We started small and got him a few (2 or 3) credit cards but most had annual fees. As the years went by, his credit rating got better and he was able to qualify for cards with better terms (no fee, lower interest rate). I thought I was being responsible and proactive when I canceled his older cards, but his credit score took a huge dip. I later learned how important the "age" of the account is when calculating a credit score. I wish I would have let those older cards sit around for a few more years. Paying the annual fee would probably have been worth it when we applied for our first mortgage. Moral of the story: if you're young or don't have much credit history, keep all your cards open (with empty balances) if you know you will be applying for a larger credit transaction (i.e. a mortgage). Once you know you don't need to qualify for something in the forseeable future, then cancel the cards with the annual fees. (Anything without a fee we now just let sit in a drawer and collect dust - but it remains open.)