Many financial experts say one credit card is all any consumer needs. Yes, it’s possible to have multiple credit cards and manage them wisely, but ultimately, the typical consumer should be able to get by with only a single card. However, if you happen to make a lot of purchases online or travel, you may want one card for that activity and another card as a back-up. The logic being if your account is compromised and it’s closed, you have another card as a backup. If you have multiple credit cards and you’re wondering which one(s) to keep, you might be thinking you’ll simply cancel all but one of them. This is actually not recommended; once you’ve got a credit card account open, in most instances, it’s better for your credit score to keep the account open, but to avoid carrying balances from month to month. Closing an account can negatively impact your credit, for reasons we’ll discuss below.
First, consider “keeping” a credit card account 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 actually use.
Why you shouldn’t close your unused credit card accounts
Every credit card account 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 or 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.
How could your credit score be negatively affected by closing a credit card account? Your credit or what is commonly known as the FICO score is made up of five factors:
- Payment history makes up 35% of your score
- Length of credit history makes up 15% of your score
- How much you owe makes up 30% of your score
- New credit is 10% of your score
- Your credit mix is the final 10% of a score
When you close a credit card account, it will no longer factor into the length of your credit history. 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 potentially lose a long-standing boost to your “length of credit history” portion of your score.
You’ll also potentially create a problem with your credit mix if you have a lot of non-credit card debts 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” portion of the score.
The biggest factor of your score that will be affected if you close a credit card account is your amounts owed. This is also called your “utilization rate” (credit card balance/limit ratio). The idea is the credit scoring compares the amount of credit you are using compared to the amount you have available to you. 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 score, as you have plenty of capacity that you aren’t using.
But if you cancel all but the card with a balance, you now owe $1,000 out of $1,000 total available, for a utilization rate of 100%. This same balance owed is now hurting your credit score, because you are fully maxed out. Better to keep the unused accounts open to keep your utilization rate low.
While experts advise keeping your credit card utilization below 30 percent, keep in mind that lenders also care about the total dollar amount of your available credit. If you have a low credit limit, it’s not automatically a big problem if your credit card utilization rate is slightly higher than recommended.
We recommend never purchasing more than you can afford and paying your credit card balances in full each month to avoid expensive finance charges. However, don’t expect to pay in full alone on a maxed out credit card to lower your utilization. The balance reported is the amount owed when you receive your billing statement. The only way to have a zero balance is to not 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 credit. If you have to apply for new credit cards, those new inquiries affect 10% of your score. But if you have open credit accounts that you must use, you can request 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 new credit when you need it, negatively impacting 10% of your score.
So all together, you have 30-65% of your score that can potentially be impacted by closing unused credit card accounts. The math is clear; don’t close unused accounts. Keep them paid off and open, and your score will benefit.
Your VantageScore (a credit scoring model created by the three major credit bureaus) will be similarly affected, though the percentages are a bit different:
- Payment History 40%
- Age of Credit 21%
- Percent of credit used 20%
- Total balances 11%
- New credit/inquiries 5%
- Available Credit 3%
Regardless of what kind of scores your lenders use, keeping accounts open is usually a better choice.
When should I close an account anyway?
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 transfer the balance to separate individual accounts. 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. To be sure your credit is protected, you should close joint accounts altogether. Having a joint account get sent to collection will make a difficult situation like divorce even more stressful.
- Secured cards. If you don’t have credit, you might have to set up a secured credit card account in order to establish a credit rating. In this case you might have to deposit $500 or $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 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 and the credit card holder won’t convert it, you might want to close the account so you 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 will build your credit score so 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. In order to get the credit card lenders to participate and offer you concessions, and to ensure 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 retain one card for business purposes.
What to Do If You’re Closing an Account:
If you do decide to completely close a credit card account, 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 you close it, the negative impact on your credit score could be much greater.
- Redeem any rewards available on your account before you close it.
- Keep the account 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 or car loan, don’t close the account yet. Pay it off and leave it dormant. After you get approved for your new loan, then you can close the account.
- 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. Request they send you a written reply that the account was closed at your request.
How to Choose Which Credit Card to Keep
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 of the card to compare:
- 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’re picking between a card with an annual fee vs. one that has no such fee, pick the free one. 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 account.
- Rewards. If one card gets you especially good rewards or bonuses 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 great credit and avoids any interest charges. The rewards you earn along the way are an extra benefit.
- 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 frequently at that store. We wouldn’t advise keeping a card that you can only use at one store, though. It should be an affinity card with a Visa or MasterCard logo so you can use it at many locations.
- Your oldest account. Because 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. Some creditors will close unused accounts, and you definitely don’t want to lose this one.
- Debt Management Plans. If you are signing up for DMP and you need to keep one card open for business purposes, your personal financial coach can help you determine which card is the best one to keep.
If you aren’t sure how to proceed with your credit card accounts, call us for a free session. We’ll help you assess all of your debts and come up with a budget you can live with.