Nowadays, consumers seem to think it’s a major no-no to close a credit card.
Why? Because it may affect your credit score. And by affect, I mean lower your credit score.
But this all seems to have been blown out of proportion.
The reality is that you can and should close a credit card account if you no longer use it and don’t ever plan on using it.
Sure, doing so may lower your credit score, at least temporarily, which is why it’s not smart to close a credit card account while applying for other loans, such as a mortgage or an auto lease.
But the impact shouldn’t be all that severe either way.
Why Does It Lower Your Credit Score?
When you close a credit card account, you are essentially removing a line of credit from your aggregate credit line.
This means your total available credit line will fall, and your utilization will rise.
Aggregate credit line: $50,000
Credit card A credit line: $10,000
Outstanding credit: $5,000
If you kept credit card A open, you would be using 10% of your available credit.
But if you closed credit card A, your utilization would rise to 12.5%, as your aggregate credit line would fall to $40,000.
So you can see where closing a credit card account would lower your credit score.
So Can I Close My Credit Card?
Well, the impact of a closed credit card account will lessen significantly if you’ve got plenty of available credit and small or zero balances on your other credit cards (good credit score).
However, if you’re other accounts are maxed out, closing an open account with plenty of available credit will do more damage, as you’ll seem overextended (bad credit score).
And as mentioned earlier, you shouldn’t tinker with your existing accounts before and during applications for major loans – doing so could put your approvals in jeopardy, so it’s best to wait until your new loans are finalized.
Tip: If you do close a credit card account, try to avoid closing your oldest healthy tradeline, as an old credit line tends to carry more weight than a new one.