Optimal Credit Card Management Strategies

Many financial experts say one credit card is all any consumer needs. Most people can manage well with just one credit card, even though it's possible to handle wisely having several credit cards. If you shop online or travel often, use one credit card for these and have another as a backup.

The Role of a Backup Credit Card

If you're deciding which of your multiple credit cards to keep, you might think about canceling all but one. However, this isn't usually the best move. Keeping your credit card accounts open is generally better for your credit score.  

Just make sure not to accumulate debt on them month-to month. Closing a credit card can lower your credit score, and we'll explain why later.

Managing Multiple Credit Cards

Keeping a credit card means that you’ll keep it active and use it regularly. Other accounts may remain open, but be used infrequently. So while we’re recommending you keep most of your accounts open, the card you “keep” is the one you will use.

Why You Shouldn’t Close Your Unused Credit Cards

Impact on Credit Scores by Closing Credit Line

Every credit card you have open contributes to your credit score in various ways. Closing the account could ultimately lower your credit score, so instead of closing the account, it’s better if you pay it off and put the card away in a safe and secure location (such as your locking file cabinet at home). Using that card at least once a year may be necessary so the issuer knows you intend to remain their customer and you won’t find your card closed due to inactivity.

Strategies for Maintaining Old Credit Card Accounts

How could your credit score be negatively affected by closing a credit card account?

Your credit score, or what is commonly known as the FICO score, is made up of five factors that make your credit scores range based on credit scoring models:

1.     Payment history makes up 35% of your score

2.     Length of credit history makes up 15% of your score

3.     How much you owe makes up 30% of your score

4.     New credit is 10% of your score

5.     Your credit mix is the final 10% of a score

When you close a credit card account, it will no longer factor the length of your credit history into your credit reports. If the account is relatively new, you won’t notice an impact, but if the account is one you’ve had for a long time, you will lose a long-standing boost to your “length of credit history” part of your credit scores within your credit reports.

You’ll also create a problem with your credit mix if you have a lot of non-credit card debt and then you close all of your credit card accounts. Keep your accounts open to maintain a good balance of different types of available credit to boost the “credit mix” part of your credit reports.

The biggest factor in your score that will be affected if you close a credit card account is your credit card debt. This is also called your “utilization rate” (credit card balance/limit ratio). The credit scoring models compare the amount of credit line you're using compared to the amount of credit limit that you have available.

If you have 10 credit cards with a total credit limit of $10,000 ($1,000 each), but you only owe $1,000 to one card, your utilization rate is 10%. This is very good for your credit scores, as you have plenty of credit lines that you aren’t using.

If you cancel all cards except the card with a balance, you now owe $1,000 out of the $1,000 total available, for a utilization rate of 100%. This same balance owed is now hurting your credit scores, because you are fully maxed out on your credit reports. It's better to keep the unused accounts open to keep your utilization rate low.

We recommend never purchasing more than you can afford and paying your credit card balances in full each month to avoid credit risk and expensive interest rate charges. However, don’t expect to pay in full alone on a maxed-out credit card to lower your utilization. Use your card responsibly to avoid any credit risk that may affect your credit reports.

The balance reported is the amount owed when you receive your billing statement. The only way to have a zero balance is not to use the card for an entire billing cycle or pay the balance immediately after your purchase so that your billing reflects a zero balance due.

A final potential factor is a new card. If you have to apply for more cards, those new inquiries affect 10% of your score. But if you have open credit accounts that you must use, you can ask for a new card from that lender and start using one of your existing accounts instead of opening a new one. If you close all of your unused accounts, you have no choice but to apply for a new credit when you need it, negatively impacting 10% of your credit scores.

All together, you have 30-65% of your score that can impact your credit report by closing unused credit card accounts. The math is clear; don’t close unused accounts. Keep them paid off, open, and keep building credit history. Your credit report will benefit from having a good credit score.

Your VantageScore (a credit scoring model created by the three major credit bureaus) will be similarly affected, though the percentages are a bit different:

1.     Payment History 40%

2.     Age of Credit 21%

3.     Percent of credit used 20%

4.     Total balances 11%

5.     New credit/inquiries 5%

6.     Available Credit 3%

Regardless of what kind of scores your lenders use, keeping accounts open is usually a better choice for most credit scores.

When Should I Close an Account?

Specific Scenarios for Account Closure

Some situations will lead you to close an account, even if it might cause a hit to your credit score:

• Divorce: If you have a joint account with your spouse and you get divorced, it’s often a good idea to close the account and do balance transfers to a separate individual account. A judge might rule that one party is responsible for the debt on a particular card, but credit card companies aren’t bound by the judge’s ruling, and they will pursue collection activity against both accountholders. Avoid any credit risk and be sure your credit score is protected, you should close joint accounts altogether. Having a joint account get sent to collection will make a difficult situation like a divorce even more stressful.

• Secured credit card: If you don’t have a good credit score, you might have to set up a secured credit card account to establish a credit rating. In this case, you might have to deposit $500, $1,000, or more into an account before you can use the account, which is your guarantee for the credit card. This removes the risk for the credit card company, so you gain access to credit. After a time, if you prove yourself capable of managing the credit account and build a good credit score, the lender may convert the account to a regular credit account and refund your deposit. If after you’ve had the card and made payments for some time, no miss payments, and the credit card holder won’t convert it, you might want to close the secured credit card and get your security deposit back.
• Annual fees: If your card carries an annual fee and you don’t intend to use it again, it’s best to just close it. If you have another account you’re going to use that is building credit, then there’s no reason to pay an annual fee just to keep an account you don’t use.
• Debt Management Plans: If you sign up for a DMP with Credit.org, we typically direct you to close all of your existing credit card accounts. The DMP is for consumers that have excessive or unmanageable credit balances. A payment plan is established that gets your debts paid off on an accelerated timeline and often at lower interest rates. To get credit card lenders to participate and offer you concessions, and to make sure the DMP succeeds, closing all open accounts is part of the deal. However, for small business owners or those requiring a credit card for work, an exception can sometimes be granted to have one card for business purposes.

Steps to Take Before Closing a Credit Card

If you do decide to completely close a credit card, there are some important steps to take first:

• Make sure the card is not associated with any automatic payments or subscriptions. You don’t want charges coming into the account after you’ve closed it. Make sure you switch all online accounts and subscriptions to your preferred credit card.
• Pay off the card before you close the account. If you owe a balance on an account and close it, you'll see a negative impact on your credit score which affects your overall credit report.
• Redeem points or any premium rewards available on your account before you close it.
• Keep the card open for a few months after you stop using it before you close the account for good. That way you’ll see any delayed charges, refunds, or subscriptions that come in.
• If you’re planning to apply for a loan soon, such as a mortgage loan, personal loans, or auto loan, don’t close the account yet as this may affect the lending decisions. Pay off the card and leave it dormant. After you get approved for your new loan, then you can close the card.
• If you’re closing multiple credit card accounts, don’t close them all at once. Stagger closing the accounts by closing one account per month. This will lessen the impact on your credit scores.
• Make your request in writing to your credit card issuer. Ask that the credit card company report to the credit reporting agencies that your account was “closed by consumer request.” Accounts that are erroneously reported as “closed by creditor” can hurt your credit rating. Ask them to send you a written reply that the account was closed at your request.

How to Choose Which Credit Card to Keep

Comparing Credit Limit and Card Features

Now to the question at hand: which credit card should you keep? Whether you’re canceling your other accounts or leaving them open and storing the cards safely away, you’ll need to choose the best account for you to continue to use.

It’s good to make regular use of your one active credit card account for the sake of your credit score. There are many features available to compare cards to like:

• Credit Limit: A key factor in selecting a credit card is its credit limit. A higher limit offers greater financial flexibility and aids in maintaining a low credit utilization ratio, crucial for a healthy credit score. For instance, a $10,000 limit with a $2,000 balance equals a 20% utilization rate. Ideally, keeping this rate below 30% is beneficial. Opting for a card with a higher limit helps manage fluctuating balances while keeping the utilization rate low, indicating to most lenders that the client is using the card responsibly.
• Interest rate: For a lot of people, this is the first consideration. They want to keep the card that is the least expensive to use. But ultimately, your goal should be to pay off your card every month and carry no balance from one statement to the next. In this case, you won’t pay any interest, so the rate would not be the most important factor. If you think it will take some time to get everything paid off where you can maintain a zero balance on the card going forward, you could pick a card with the lowest interest rate for budgetary reasons.
• Annual Fee: This is pretty straightforward—if you compare cards with an annual fee vs. one that has no such fee, pick the free one, it's the best credit card choice. A card would have to be pretty great in all other respects to justify paying an annual fee when you could simply go with another card that doesn’t charge you just to have the best credit card.
• Rewards: If rewards credit cards get you a good bonus offer or bonus cash for regular use, it might be a good choice. The idea is that you’ll use the card a lot for convenience, but pay it off every month. This builds a great credit score and avoids any interest charges. The premium rewards you earn along the way are an extra benefit of rewards credit cards.

• Discounts: Like rewards, you might get a discount at a particular retailer for using their card. We never recommend signing up for a credit card just for a discount, but if you already have such an account, you might choose it as your go-to if you shop often at that store. We wouldn’t advise keeping a card that you can only use at one store. It should be an affinity card with a Visa or MasterCard logo so you can use it at many locations.

Importance of the Oldest Credit Account

• Your oldest account: Your “length of credit history” is a significant chunk of your credit score. You should definitely keep your oldest account open. If its terms are good, it might be a good one to keep actively using going forward. Most lenders will close unused cards, and you definitely don’t want to lose a credit card with a long history as it will impact a good credit score negatively.
• Debt Management Plans: If you are signing up for DMP and you need to keep one card open for business purposes, your personal debt counselor can help you determine which card is the best one to keep.

Consulting with Financial Experts

If you aren’t sure how to proceed with your credit card accounts, contact us for a free session. We’ll help you assess all of your debts and come up with a budget you can live with.

We also help with other kinds of debts like mortgages, student loans, and more.

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