Why Closing an Unused Credit Card Hurts Your Score

Laura Slawny • December 7, 2016

Everyone wants a better credit score. It can help you get better interest rates, mortgages and car loans, as well as great perks that only come with the very best rewards cards.

One of the biggest mistakes people make is they consolidate their debt on to a new low interest card and then close the older accounts.

This can work against you in three ways.

1. Balance transfer carry fees

Whenever you transfer a balance to a new card or account, you usually have to pay a fee and/or a higher interest rate.

Even if you get a new card with a limited introductory zero percent APR, there are usually fees tacked on. Plus, if you don’t pay off the balance within the designated time frame, your interest rate will skyrocket and you can wind up even deeper in debt.

2. Closing your oldest credit lines can lower your score

Fifteen percent of your FICO credit score is calculated based on the length of your credit history. Holding the same credit line for 10, 15 or 20 years shows you have been a steady customer.

Do not close an unused credit card from the past that may have been helping your score.

“A credit history with the same

lender makes you a better risk.”

3. Closing credit lines will change your utilization ratio

This is the percentage of the total amount you could owe if you maxed out all of your credit lines compared to the amount you currently owe. A high ratio can work against you.

Compare these examples that show a combined $1,000 balance if you have two, three or four credit cards, each with a maximum $1,000 credit line.

The balance remains the same, but as you close accounts, the total credit that is available to you shrinks. The percentage of what you owe, divided by what you could owe, is your credit utilization ratio.

Total Cards

Total

Balance Owed

Total Available Credit

Credit

Utilization Ratio

4$1,000$4,00025%  (1,000 ÷ 4,000)
3$1,000$3,00033%  (1,000 ÷ 3,000)
2$1,000$2,00050%  (1,000 ÷ 2,000)

You can see that with only two credit lines, you are borrowing 50 percent of your maximum amount – and that doesn’t look good to lenders.

If you want to boost your credit score, don’t close your accounts.

Instead, pay off the balance and quit adding new debt. This will allow you to maintain your maximum credit line in the case of emergencies and lower your utilization score.

Want some other ways to boost your credit score? Check your credit report at least three times a year, pay your bills on time and never let your debt go to a collection agency.

You could also apply for a secured card, which will both prevent you from taking on more debt and also report your activity to the big three credit reporting bureaus.

Photo source: come2dallas.com.

Editorial Note: Opinions expressed here are the author's alone, not those of any bank, credit card issuer, airline or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.

About the Author

Laura Slawny

Laura Slawny is an award-winning executive news producer with more than 15 years experience writing about issues that impact families all over America. Since 2012, her focus on personal finance has helped consumers in the U.S., Canada and Australia. Laura believes complex financial concepts should be easy for everyone to understand. Her work appears on multiple consumer websites, both as an author and ghost writer. She also enjoys writing about leadership and healthy living. Connect with Laura on Google+.