Business Credit Card

If you’ve had credit for a while, you’ll almost always find old accounts you don’t use anymore listed as still open on your credit report. Unless you actually tell the lender you want to close your credit cards, they probably won’t. (They’d love it if you’d use them again.) But if you do ask, they have to list them as closed at your request.

But is this best for your credit? Maybe not. FICO has said that closing old accounts can never help your credit score and can only hurt it. If you talk with a savvy mortgage broker, however, you’ll hear how they had a client who closed some inactive accounts and boosted her credit score. But it can hurt your credit score, for three reasons:

You’ll probably close the older accounts. While closing an account does not remove it from your credit history, once closed, those old accounts may drop off your credit history and this will shorten the average length of your credit history. With credit scores, a longer report is better.

Credit scores look at your available credit to outstanding debt ratio. Close some accounts and you may appear closer to your total available credit limits. FICO scores don’t care about how much total credit you have available, though individual lenders may take that into account.

Closing accounts may leave you with too few credit references.

Here’s an email credit expert, Gerri Detweiler, received from a mortgage broker about his client’s experiences with closing accounts:

I had an interesting day. First thing this morning I ran a credit report for one of my customers and got scores of 648, 677, and 684. She couldn’t understand why her credit scores were so low since she ran her credit just two months ago and got all scores in the 700 – 710 range. Since I couldn’t see any reason at all why her score had gone down, no late payments and not a lot of other credit available, I asked her if she had closed any credit cards lately. It turned out that she had just closed what was most likely her oldest card. I don’t see any other reason her credit took such a drop so this must have been the cause.

Gerri told this story to a colleague, who had a very different story. A couple months before, she ran her report and got scores around 570. She had 17 open credit cards and a lot of available credit but not one late payment. She closed 7 credit cards and was smart (or lucky) enough to close the new ones and keep the old ones. A month later her credit score went up to 640.

My guess is that in both cases the change in credit was so large because they are both very young and don’t have a lot of credit history. I doubt that there would be so much of a change in either case if they had 20 – 30 years of credit but who knows?

As Gerri suggests, if you really want to close out those inactive accounts, do it one by one – perhaps no more than one every six months. FICO recommends you start by closing retail cards rather than major credit cards, and close more recent ones rather than older ones. Leave several open for emergencies as well as for a better credit history.