How Canceling Old and Unused Credit Cards Can Hurt You
A lot of people carry around more credit cards than they need or use. One might think that canceling or closing the old and unused credit cards would be the most financially responsible thing you can do. Well, not necessarily.
In fact, canceling or closing your oldest and/or least used credit cards may be more trouble than its worth. The act could irreparably damage your credit history. Your credit score could suffer. Worse, you may unintentionally decrease your current line of credit. For many people, it just isn’t worth it. Here’s why.
Credit History Erasure
Once you close a credit card account, it is erased/removed from your credit history after ten years. This means, if you close your oldest credit card, you could wipe out significant portions of your credit history. And, your credit history may look much shorter than it actually is. You may have to start from square one to reestablish your credit history.
Your Credit Score Will Suffer
First, a variety of factors determine your FICO credit score, such as how much credit you use in comparison to your credit balance. Also, the overall length of your credit history, and most importantly, your history of credit card payments, are all important parts of your score. You’ll have less credit to include in your debt to credit ratio.
Also, your payment history determines about 35% of your FICO score. Negative credit histories can last for years and may be continually updated. However, imagine if your history of diligently making your payments on time is erased. Over time, your FICO score may decrease in as are result of closing your oldest credit card accounts.
Closing Accounts May Appear Suspicious
Imagine how closing several credit cards all at once, including your oldest credit cards, might look to potential lenders. Your credit history will appear much shorter. It may also look like you are trying to hide something. If you close accounts, do so one credit card at a time, and make sure you aren’t losing any of your aged accounts.
How To Cancel/Close Credit Cards the Safe Way
It’s probably in your best financial interests to keep your credit cards open for as long as possible. If you cancel or close a credit card, make sure it is paid out in full. You could cancel a card with a balance, as long as you transfer it to another card, ideally one with a lower or no APR.
Make sure you talk to a customer service representative. Get the person’s name and record the time and date of the conversation. Request an official letter be sent to you verifying the closure of the account. Retain documentation of the request for the future, if needed.
Finally, make sure you check your credit reports later for any potential errors. Also, check to see how canceling the credit card may have affected your score and credit history. Keep in mind that you may have up to three credit scores to check, but the most commonly used score is still FICO.
To Cancel or Keep it Open? Depends On The Card
Some credit card issuers penalize cardholders for periods of inactivity. There are a lot of credit cards with high interest fees, annual fees, and various penalties that make them too expensive to keep. As long as you pay your balances in full, it’s probably best to cancel such cards.
However, your oldest credit cards are the building blocks of your credit history. Canceling them can result in serious damage to your credit history. Remember, all debt isn’t bad. As long as those cards aren’t costing you money, it’s probably best to leave your unused credit cards alone.
Have you closed an old credit card account? Let us know how it affected your credit in the comments!