What happens when you close a credit card?

April 13th, 2012 Kevin Crall

Do you have credit cards that you opened to collect extra miles or a discount at your favorite store? Or perhaps you have some extra credit cards from your college days? If so you’re probably wondering if it’s time to close some of those extra lines of credit.

It’s easy to take your scissors to your credit card. But before you snip it in half, know this: if done incorrectly, closing a credit card can have dire ramifications on your overall credit and credit score.

Here are 3 key things to keep in mind when you are considering closing a credit card.

Don’t close your oldest credit card.

Closing an old credit card can shorten your credit history. And since lenders typically view borrowers with short credit histories as riskier than borrowers with longer histories, it can impact your credit score. (While it may not impact your credit score immediately, you may see an unexpected credit score drop when the card falls off your credit report in the future.)

Consider this – you have one credit card that has been open for 10 years, and one newer card that you’ve had for 2 years. If you close the 10-year-old card, you’re essentially losing 8 years of credit history.

Don’t close a credit card just because you haven’t been using it.

There are many factors that make up your credit score. Among them is your “credit utilization.” Credit utilization is the ratio of your credit card balances to credit limits as listed on your credit report. For example, if your balance is $300 and your credit limit is $1,000, then your credit utilization is 30%.

The lower your credit utilization, the better. That shows you’re only using a small amount of the credit that’s been loaned to you.

If you close one credit card (even if you haven’t been using it) it will increase your credit utilization because your overall available limit will go down.

Don’t close your only credit card.

The different types of credit you have play an important role in your overall credit score. As a result, it’s important to have at least one open line of credit to add points to your credit score. This will show lenders you have experience with this type of account.

When you’re considering closing a credit card, make sure you look at the big picture. After all, you should be just as selective about the credit cards you close as the ones you open.

Kevin Crall

About the author

Kevin Crall is Assistant Retail Manager at MidWestOne Bank. He works with MidWestOne customers to help them manage their personal finances and identify effective money management solutions.

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