Why A Finance Expert Says You Shouldn’t Close Your Credit Cards—Even After Paying Them Off
There are few things more adult-ish than the feeling of accomplishment when you finally pay off one of your credit cards. And after years of chipping away at that debt, you may be eager to close the account for good—but not so fast, say the experts.
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Although it seems like closing the card to remove temptation would be the most responsible choice (the mean credit card debt for American families is $5,700, after all), this can actually be detrimental to your credit score. Why, exactly? First, you’re erasing data that shows you are a responsible lendee, and it can be particularly problematic if it’s the oldest card in your wallet.
“If the card in question has been paid down but happens to be someone’s oldest card, they would want to hold onto it just to provide some ‘age’ in their credit history,” says Tess Wicks, a personal finance coach and host of the Wander Wealthy podcast.
Your length of credit history accounts for 15 percent of how your FICO score is calculated, so it’s important to keep your oldest cards open so that you don’t decrease the average age of your accounts—something that younger borrowers especially should keep in mind, according to Lauren Anastasio, a certified financial planner for SoFi.
“Think about credit activity as a history that averages out over time; a consumer with 40 years of credit history when averaged with one negative event will have a smaller overall impact than someone with only four years of history would have from the same event, like a late payment or closing an account,” she says.
Another reason you shouldn’t close your credit card account? You’ll want to keep your lowered credit utilization ratio (or the percentage of credit used compared to how much you have available).
“After paying a card down to $0, the utilization for that card is 0 percent. This can help offset other card’s utilization rates and make the overall utilization in a credit profile lower,” says Wicks.
Generally, when it comes to credit utilization, the lower the ratio, the higher the credit score, as amounts owed on all of your accounts makes up a whopping 30 percent of a FICO score.
So, if it’s not a good idea to close your credit card account, what exactly should you do with it? Cut the cards up, freeze them in a block of ice, or leave them in a drawer at home, suggests Anastasio.
“Most cardholders want to close their cards primarily because they’re worried about spending on them,” she says. “Try to keep temptation to a minimum and see if you can break overspending habits before permanently closing accounts.”
If the credit card in question has a hefty annual fee (like many cards that award you travel points or give you cash back options) and you don’t plan on using it enough to reap the benefits, you can try to call the credit card company to see if there is an option to waive it or switch to another card product that doesn’t have a fee.
Though there are plenty of pros to keeping your credit card accounts open, there are occasions when it’s appropriate to close. If keeping the card will cause you more harm than good (such as contributing to overspending or causing you to miss a payment), then go ahead and close it, just as long as it’s not your oldest card, says Wicks.
You may also want to close credit card accounts to simplify your life. You can strategically get this done without affecting your credit score by paying down your balances on different accounts and then monitoring your credit utilization before closing.
Ultimately, when you are trying to make financial decisions like these, it’s best to “know thyself,” says Wicks. In other words, do what makes the most sense for you and your long-term financial goals.