Should I Close My Credit Card Accounts?

The Mortgage-Pro · Site Admin Joined: 19 Jan 2005 Posts: 2248

Most consumers have credit cards, lines of credit and other accounts listed on their credit report that they haven’t used in years. Credit cards, for example are rarely listed as closed unless the consumer asks the issuer to close them.

When they see those old accounts listed as open, most people’s first inclination is to close them. In fact, “account was closed” is one of the top disputes reported by credit bureaus.

But should you tell your clients to close old accounts? Maybe not. In fact, closing accounts may drop their credit scores. I’ll tell you why in a moment.

But first, a caveat for loan professionals: Many of your clients will expect you to be an expert on credit scores. But one of the things I’ve learned in many years of researching these issues is that it’s very difficult to accurately predict the effect of a particular action on a credit score. Since scores take into account everything in the consumer’s report, closing an account may have a positive effect on one person’s score, a negative effect on another, and do nothing to still another person’s!

A tool such as a credit score simulator (which I’ll discuss in a future article) can make it easier to give you advice about ways clients can boost their scores. In the meantime, here’s some advice you can pass on to clients who want to know whether to tell their clients to close extra accounts.

Fair Isaac, creator of the widely used FICO credit scores says that closing old accounts can’t help your credit but may hurt it. There are several reasons why:

While closed or open accounts both count in calculating your credit score, once an older account is closed it may drop off your credit report, and that may shorten the overall length of your credit history. When it comes to credit reports, an older credit history is better.

More importantly, maxing out revolving accounts can hurt your score. Anytime you use more than 50% of your available credit on a revolving account such as a credit card, your score can start taking a hit. (It’s impossible to say exactly how much, though, since it depends on other factors in your credit history.) FICO scores evaluate your “utilization” level both on individual accounts, as well as the total of all revolving accounts. Extra available credit can be helpful in keeping this utilization level down.

What about the notion that your score will suffer if you have too much revolving credit available? Fair Isaac says the amount of available credit is not a stand alone factor, so it shouldn’t be of concern to consumers. One of my colleagues, Scott Bilker, founder of DebtSmart.com has eighty open credit cards and a score in the 800s!

Fair Isaac recommends leaving unused revolving accounts open. If you do want to close accounts, however, they recommend you close more recent retail cards and those with smaller credit limits. Don’t close your oldest accounts.

By Gerri Detweiler