Myth Busted: Here’s What Really Happens When You Close an Old Credit Card
I opened my first credit card right before senior year of college.
I didn’t want to — I suppose I fit the millennial mold — but my parents told me I needed to build credit or else I’d be screwed.
I used the card mostly for groceries because I earned extra points. Elsewhere, the rewards were weak. Plus I was really, really paranoid about remembering to pay the monthly bill.
Fast forward a few years, and now I have a Chase Sapphire Preferred card. I love it because it has a great rewards system, and it’s made of metal, which makes me feel like I have more money than I do.
However, I still hang onto my old card. I talked about shutting down the account, but various people warned me this could affect my credit. To me, it felt like the fewer credit cards to my name, the better and more secure…
So is it bad to close a credit card?
Does Closing a Credit Card Affect Your Credit Score?
I chatted with John Ganotis, founder of Credit Card Insider, and Rod Griffin, the director of public education at Experian.
I found out that, yes, closing a credit card will impact your credit score.
However, it’s not necessarily anything drastic.
“Closing a credit card will hurt your credit score initially, but typically [it’s] only a small amount and only for a little while,” Griffin says.
The main reason for that initial drop is because you’re wiping away the available credit limit from the card you’ve closed. But your balances don’t change, so it looks like your total balance is a higher chunk of your total available credit.
The technical term for that percentage is utilization rate.
In other words, “[Credit-scoring models] like to see low balances relative to your total available credit,” Ganotis says.
When that utilization rate goes up, credit-scoring agencies see it as a sign of risk, Griffin says, so it’ll hurt your score a little.
But only a little.
“Typically, if everything else is fine in your credit report, after a month or two, those scores will come back up because it will be clear you didn’t take on more debt; you just closed an account,” Griffin says.
And what about your credit history?
That’s the main reason my parents encouraged me to open up that credit card, so I could start building my credit history.
Also, that’s what I hear when I contemplate aloud about shutting the card down: Your credit history will be destroyed.
However, when you close a credit card that’s been paid off in full — even your oldest one — the history remains on your credit report for 10 years.
This is a common myth, Griffin says.
“For most people, by the time that 10 year period ends, they’ve already opened new accounts,” he says. “[They] have new history and so it offsets that being deleted.”
But if you have an unpaid balance or any sort of negative history associated with that credit card, you’ll have to wait seven years from the date of your last payment for that to dissipate.
So When Should I Close a Credit Card?
Ganotis’ rule of thumb is to keep an unused card open unless you’re paying an annual fee.
“My general advice is that if the card is paid off and doesn’t have an annual fee, it’s probably a good idea to just leave it open and not use it,” he says.
But sometimes your credit card issuer might notice the card hasn’t been used in a hot minute and will close the account.
Don’t panic; that’s OK because Griffin says if you haven’t used the card in a while, its past activity might not even affect your score.
“If you haven’t used a card for six months or a year, it’s going to be shown on a credit report, in most cases, that it would be inactive,” Griffin says. “Because there’s no activity, scores may not be able to use that account for the calculation anyway.”
However, Griffin reminds consumers to always step back and take a look at their financial situation.
For example, if you have plans to take out a mortgage in the next three or six months, you might just want to hold tight. Continue to pay off the bills. If you haven’t touched the account in a while, Griffin says you might even want to make a small purchase then pay it off in full so there’s activity.
“You don’t want to close the account in the middle of a mortgage application process and have your score drop and cause you to have to pay higher interest rates,” Griffin says.
On the other hand, if you already have debt and the temptation of the plastic is just too much, close it. You might see your scores drop initially, but in the long run it’ll help you better manage your debt.
“The score isn’t what you should be concerned about,” Griffin says. “It’s managing the debts you already have and getting rid of that temptation to take on more debt when you can’t finance what you already have.”
If you want to get a big picture view of your credit report, go ahead and pull a free one from Credit Sesame.
“It’s usually not as bad as you think,” Griffin says.
Poke around in there, and see what’s happening. Think about what your next few months will look like financially. If you’re not planning to make any big moves (or take out any big loans), then you should be safe shutting down that old piece of plastic.
Me? I’m staying put for a while, so I think I’ll take the leap, shut down my account and 10 years from now, I probably won’t really care.
Carson Kohler (@CarsonKohler) is a junior writer at The Penny Hoarder. She doesn’t like keeping tabs on too many accounts.