Early in our marriage, my wife and I applied for a flurry of credit cards for a variety of important reasons: building our credit history, earning large discounts, getting a free hat. But after the cards had served their original purpose, we paid them off and eventually found ourselves with a desk drawer full of cards that were rarely, if ever used. We wanted to be responsible, but we weren’t sure what to do.
A common reaction would be to just cancel them all and move on, especially if you are planning on living abroad and starting a new financial history in a new country. But, that may not be the best advice if you want to maintain a high credit score stateside. Because, closing cards rarely helps your credit score, but it has the potential to hurt it.
In The Do’s and Don’ts of Closing Credit Cards, Jenna Lee of U.S. News and World Report charges into the topic with additional tips to guard your credit rating.
Mix it up—Preserve a healthy mixture of accounts (loans, cards, etc). Closing your only credit card could throw off that balance and reduce your score.
Bargain hunt—Negotiate with your card issuer for lower rates and fees to save some money while keeping your positive payment history.
Cut the costs—Consider canceling cards that are costing you money with high interest rates or miscellaneous fees.
Stay balanced—A utilization rate measures how much credit you’re using compared to how much you have available—the lower the utilization rate, the better. Closing a card can increase your utilization rate, so it may be worthwhile keeping a card open – just to keep your rate low.
And, as you are considering those suggestions, Lee advises against:
Closing all cards—In addition to potentially damaging your credit score, you still may need emergency credit.
Closing cards before financing a major purchase—When applying for a mortgage or auto loan, you want your score to be as high as possible so you can score the lowest interest rates.
Abandoning old cards—Periodically buy a tank of gas or have a small, recurring payment withdrawn, then pay it off. A consistent payment history helps your score, while no payment history can hurt it.
If you decide to close a card, remember the 3 Cs
Cancel it—Simply cutting a card into pieces may be effective for keeping you from using it (as well as being quite cathartic), but take it a step further to ensure the card is cancelled:
Confirm the close—If you cancel via phone or online, follow up by sending a certified letter to the customer service department and asking for a confirmation letter.
Check your report—Your closed accounts and their payment histories will stay on your credit report for seven or more years, but they should be marked as “closed.”
While these Dos and Don’ts may not be at the top of your own To Do list, they can help you take a step in the right direction. As with all missionaries, you’ve got big plans for the years ahead—and having a strong handle on your credit and a healthy credit rating can have a significant impact on keeping those plans on track.