To cancel or not to cancel? When to close a credit card account

By , CardRatings Contributor
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You've paid off your credit card balance and are ready to say hasta la vista to debt. Good for you!

Now, about that credit card, should you close the account or keep it open?

At one time, conventional wisdom may have said to cancel the account as quickly as possible. Then, savvy consumers learned that arbitrarily cancelling old credit cards could negatively affect their credit score. The result has led some to have an almost irrational fear of closing old accounts.

However, there is no reason to keep old accounts open indefinitely. Instead, follow these guidelines to determine which cards are worth keeping and when to say good-bye to the rest.

Why you may want to keep that credit card

There are a couple reasons to keep a paid-off account open. By far, the most important may be to protect your credit score. Your score is calculated on a number of factors including the age of your accounts as well as your utilization rate.

If you cancel your oldest credit cards, you risk losing a long history of timely payments which can be an asset when it comes to your credit score. Payment history accounts for 35 percent of your FICO score while length of credit history is weighted at 15 percent. In addition, if you are carrying a balance on your other cards, cancelling an account could negatively impact your utilization rate.

Your credit utilization rate is the ratio of your debt to available credit. For example, if you have maxed out your cards, your utilization rate is 100 percent. If you have a $5,000 balance and your cards have a total limit of $10,000, you have a utilization rate of 50 percent.

According to some credit experts, consumers should strive for a utilization rate below 10 percent. FICO, the most popular organization for credit scores, looks at your total balances and total available credit so don't stress about keeping each card below that rate. But if you have a $3,000 balance on one card, you shouldn't close a different credit card account if it will drop your combined available credit to below $10,000.

When to close a credit card account

There are certain times when it may be best to let a card go.

  • You have too many cards: Although some individuals certainly have excellent credit scores and dozens of cards, Fair Isaac - the former name of FICO - reportedly told Motley Fool that having more than seven open credit cards can ding your score slightly. Even if your score doesn't go down, potential creditors may see red flags if your available credit is already reaching to the stratosphere.
  • It no longer fits your lifestyle: That travel credit card may have been perfect when you were you were a jet-setting single. But three kids later, a trip to the local amusement park may be the most travelling you do. If you are ready to pare down your cards, the ones that are no longer relevant to your lifestyle should probably be the first to go.
  • It charges an annual fee: No reason to pay for something you never use. Unless you get some excellent rewards points and plan to use and pay off the card every month, it is probably in your best interest to cancel accounts charging an annual fee.

When it comes to whether to keep or cancel credit cards, every situation is unique. If you are worried closing a card might affect your credit score, remember that your score is constantly evolving and no one action will permanently damage your rating.

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