By Tom Gilmour
When it comes to financial health, your credit score is one of the most important stats out there — those three digits affect everything from how much interest you’ll pay on a loan to whether you’ll qualify for a new apartment.
But, there’s a lot of confusion about which factors really affect your good credit standing — particularly when it comes to keeping card accounts open. So, this naturally leaves a lot of people wondering: Will closing a card hurt my credit score?
Why So Many People Ask This Question
The most common reason clients give for wanting to close a credit card is that they’ve finally paid off their debt, and they think that doing so will help them avoid future temptation. While those are good intentions, the truth is that hastily closing a newly zeroed-out account can actually undo your financial progress.
Related: 5 Simple Strategies For Taking Your Credit Score To New Heights
What I Tell Them
For your FICO score’s sake, it’s a good rule of thumb to leave credit cards open — especially your long-standing accounts.
That’s because credit history is an important component of what informs your score, and shutting down old accounts will shorten the length of your record, potentially causing your score to dip.
And, that’s just one consequence.
Closing a card could also increase your credit-utilization ratio. This factor — which makes up 30% of your FICO score — measures how much of your total available credit you’re currently using.
Say you have two credit cards with a $1,000 limit on each one, and a $500 balance on one card. Your current credit utilization rate is 25%. That’s a healthy amount, since it’s generally recommended that you stay below 30%.
If you decide to close the other card, your credit-utilization ratio suddenly soars from 25% to 50% — a leap that could significantly drop your score.
There’s typically just one time when I reverse my stance on this topic: If the card in question carries a high annual fee, your budget may benefit from shutting it down. But, again, make sure it’s not your oldest card, and that doing so wouldn’t send your utilization ratio into dangerously high territory.
In most cases, it’s best to keep all of your credit cards active. If you're super-tempted to shop and need help curbing your spending habits, try this instead: Take a pair of scissors and snip the physical card so you can’t use it — but leave the account open!
Next: My Quest For The Perfect Credit Score