You have been making good progress at reducing your debt and getting those pesky credit card balances lowered. Good for you. Getting credit balances paid down to at least 50% of the limit is a key way to increase your credit score. If you’ve paid one or more cards off, and now you’re thinking about closing the account, please read on.
Our advice is that you should not close a credit card account, without first taking into account exactly how doing so may affect your credit score.
A lot of people want to close paid off accounts just to avoid the temptation of racking up debt again. But you have shown diligence and financial smarts by paying off your credit card and you are obviously turning your financial thinking around. If you want to really maximize your credit score, think twice before closing the account down.
A major factor in your credit score is average age. If you are about to close down an “old” account, then your average credit age, or the average length of time you’ve had credit for each account, may be going down. This can impact your credit score. For example, suppose you have the following 3 credit cards;
Card 1 – You’ve had for 4 years
Card 2 – You’ve had for 6 years
Card 3 – You’ve had for 1 year
You’re average credit age is (4+6+1)/3 = 3.6 years
If you close either one of your older accounts, your average credit age will go down.
Example 1
Card 1 – You’ve had for 4 years (You plan to close this account)
Card 2 – You’ve had for 6 years
Card 3 – You’ve had for 1 year
New average credit age is (6+1)/2 = 3.5 years
Example 2
Card 1 – You’ve had for 4 years
Card 2 – You’ve had for 6 years (You plan to close this account)
Card 3 – You’ve had for 1 year
New average credit age is (4+1)/2 = 2.5 years
Now these are only examples, the effect could be much worse, or actually even help. In the example above, if card #3 is closed the average age would actually go up to 5 years.
When considering closing an account, always look at the age of the account and see how your average credit age will be effected. If you are like most, you have a lot of different credit accounts, and determining your average credit age is a bit more work than the simple examples above. Since your working hard to improve your credit score, I highly suggest you make a spread sheet, listing all of your accounts, their age, limits, and balances. This information will be used every time you make a credit decision, and you always want to make sure that everything you do has a positive impact on your credit score.
There are many reasons to close an account, perhaps one card has a high interest rate, or high annual fee. But you have to be careful and take everything into account to protect your credit score.
