Reasons Why You Shouldn’t Close All of Your Credit Cards
In some financial circles, once you’ve paid off your credit cards and dug yourself out of debt, you’re advised to cut up your cards, close them, and never think about them again. Taking such drastic actions may be cathartic, however, it might also inadvertently hurt your personal finances in the long run. Even if you’ve only paid your credit card off thanks to a balance transfer from a new credit card at a lower interest rate, it might make more sense to keep your unused credit card around instead of canceling it.
The reasoning behind keeping your older credit cards open once you’ve fully paid them off comes down to keeping a high credit score, which can be a crucial tool in your financial toolbox.
Put simply, closing your credit could wind up hurting your credit score, which could limit your financial options in the future. While credit scoring models vary from bureau to bureau, your credit report from Equifax, Experian, or TransUnion is still informed by a composite of information about all of your credit cards and loans. The same can be said for your FICO score. If you want to maintain your good credit, it may be in your best interest to keep your credit cards open, too.
Unless you have an annual fee on your credit card or are leveraging a newer rewards card with better benefits, it makes a lot of sense to keep most of your credit cards open. Here are just a few reasons why you shouldn’t close all of your credit cards—as well as a few strategies to keep you from maxing them out again.
Reasons you should keep your credit card open
You’ve already learned that keeping your credit cards open instead of closing them can help keep your credit score strong. That being said, why is it that an open credit card is so beneficial and a closed account isn’t?
Credit bureaus weigh different aspects of your credit card usage differently, each of which can change your credit score for better or for worse. Ultimately, it comes down to a few different factors that impact your credit score in a major way.
Here’s a quick rundown:
It keeps your utilization low
Revolving credit utilization is one of the biggest factors affecting how your credit score is calculated. Your overall credit utilization is calculated by looking at your outstanding balance and comparing it to your available credit.
The higher your credit limit is, the lower your credit utilization ratio can be—as long as you have low balances on your credit cards. This is because your credit utilization is calculated by dividing the amount of credit you’re using by the amount of credit you have available.
For example, if you have three credit cards, and each of them is maxed out at $3,000, $4,000, and $10,000 respectively, your utilization ratio is 100%. However, if you pay them down to $0, $2,000, and $9,000, your utilization changes to about 65%.
Closing your card with a $0 balance could cause your credit utilization ratio to shift from 65% to 78% since your available credit would shift from a $17,000 limit to a $14,000 limit. This example illustrates why keeping cards with lower balances or higher limits open can be crucial to improving your credit score— especially since roughly a third of your FICO score is related to utilization.
It improves your payment history
Like credit utilization, credit history is another major component of your FICO score. Having consistent payment history is the most important factor when it comes to calculating your FICO score, because it generally impacts your total score by about 35%.
As a result, if you have any missed payments on other cards, keeping cards open with zero missed payments can be crucial to bolstering your credit score.
It adds to your length of credit
Although the length of your credit history isn’t the most important part of your credit score, it still does play a role in how your FICO score is calculated. Since about 15% of your score is connected with your length of credit history, an old card becomes increasingly useful if it’s also paid off.
Especially if you’re planning on buying a house (a purchase that will involve a deep dive into the factors affecting your credit report) keeping your oldest credit card open can be an incredibly smart decision. Doing so makes it clear to lenders that you’re a stable borrower with a strong history of using credit responsibly.
It adds to your number of accounts
While credit mix isn’t a huge factor in your credit score, having a diverse variety of accounts can be important to your credit profile. As such, it’s not a bad idea to have a few different credit cards on your credit report in addition to an auto loan or mortgage.
Keeping your old credit cards open if it improves your mix can thus be an advantageous decision to make if you’re looking to raise your credit score.
Alternatives to closing your credit card
If one of the reasons you’re considering closing your old credit card is because you’re worried about racking up credit card debt again, that’s understandable. However, one of the reasons that people stay debt-free is because of how they embrace their credit cards and manage them responsibly.
Running away from your credit cards is no way to commit to being better about your personal finances, but that’s not to say there aren’t options you should consider to decrease your odds of getting back into debt.
Here are two adjustments to make to your life that can positively impact your relationship with your credit card:
Put your credit on ice
You’ve probably heard of freezing your credit report, but have you ever heard of freezing your credit card? Once you’ve paid off your credit card, consider putting a small monthly subscription like Spotify or Netflix on the card that you’ll be able to easily pay off each month. Then, put the credit card in a cup of water and freeze it in your freezer.
In an emergency, you’ll be able to thaw your card out—but you’ll have plenty of time to think about whether or not using your card is a good idea or not while you wait for the ice to melt!
Get rid of autofill
It’s no secret that credit card companies are doing everything in their power to make it easier for you to use your credit card. Eliminating so-called “friction” makes you more likely to spend money unconsciously, which can really get you into trouble with credit cards.
While autofill can be a convenient way to streamline your online shopping, it also makes it easier to increase your debt. As such, removing any autofill features on cards you’ve thought about closing can help you keep your balance low and reduce your temptation to spend. This strategy is a win-win for your budget as well as your credit score!
The bottom line
While you might think that a closed account will prevent you from maxing out your credit card again, in actuality closing your card could ultimately hurt you. Closing your oldest account can have a negative impact on your credit score by altering your total available credit in an undesirable way.
Unless you’re thinking about closing a card with a high annual fee, it’s better to let a $0 balance improve your credit utilization ratio by lowering the amount of your credit card balance you’re using. Credit bureaus also look at the payment history of the length of credit when factoring in your credit score, so your old credit card could be positively contributing to these factors as well.
Remember that one of the biggest reasons to get out of credit card debt is because it opens you up to new possibilities. While part of increasing your options by becoming debt-free stems from no longer being saddled with minimum payments, the other benefit of paying off your credit cards is that it boosts your credit score.
If you need to purchase a home or a car in the future, your credit score will play an important role in getting you a lower interest rate. Qualifying for a lower interest rate can save you thousands of dollars over the life of your loan, making it critical that you don’t inadvertently hurt your credit score by prematurely closing a credit card.
While it might be easier to avoid the temptation a credit card offers by closing it altogether, it’s much more important to build responsible habits for credit card usage. As you work to wean yourself off of leaning on your credit card, a few simple behavioral changes—such as storing your card somewhere else or eliminating autofill from your web browser—can go a long way in keeping your credit card paid off without hurting your credit score.