I’ve been diligently working my debt snowball plan and it is beginning to yield results. All but one of my credit cards have been canceled, but all of the credit card accounts remain open with each issuer. My initial plan was to close them all, but I soon discovered that gave me little negotiating leverage with the lender in the event of a rate hike or fee assessment. Now I wonder what effect closing credit cards has on my credit score. Should I leave my credit cards open?
Here are a few points to consider.
Closing older credit accounts may hurt your credit score. If you have read any of my previous articles on FICO, you probably recognize that I am not a big fan of the Fair Isaac scoring model. Having said that, I do not go around trying to intentionally do things to bring my credit score down.
Length of credit history is a component of your FICO score, so it makes sense to leave older credit card accounts open, even if they have a zero balance and the credit card is shredded.
It may make sense to close newer credit card accounts that were opened to transfer balances, etc. and paid off in short order. Newer, active lines of credit drive down your average length of credit history and negatively affect your credit score.
Too much open credit line can also be a problem. Open credit card accounts with a huge credit limit may be viewed as a liability to potential lenders, especially mortgage companies. If you have five or six cards with high credit limits (around $10,000) you have the potential for a $60,000 credit card debt.
Sure, you may not be the type to run out and max the cards, but how does a mortgage lender know you won’t do it as soon as the ink is dry on your new home contract? The best strategy in this situation may be to simply have your credit limits reduced voluntarily by contacting each card company, or simply close out two or three of your newer accounts and leave the older accounts open.
Leave one account open if you have the discipline to use it wisely. Unless you are planning to apply for a mortgage or home equity line in the near future the best bet may be to simply close all of your credit card accounts as they are paid in full, with the exception of your oldest card with the highest credit limit.
Keeping one credit card open and using it occasionally will continue to boost your FICO credit score. However, if you are one of those people lacking the discipline to carry a credit card without using it for frivolous spending, you’re better off canceling all credit card accounts and moving to a cash-only plan.
If you are like me, and went a little overboard with credit cards at an early age, you might want to consider a low-interest consolidation loan from a place like Lending Club to group your debt at a lower rate. If you go this route, cancel all but one credit card, and consider lowering the credit line down to a manageable level. If you don’t, you could wind up with a consolidation loan and more credit card debt.