When should you cancel credit cards?

March 26, 2009 8:38 PM

Over the past 15 years or so, I've been seduced into getting credit cards by low interest rates, enticing bonus programs, and 10-15% off major purchases at specific stores. Since then, I've grown financially to a point where I really don't need to use any credit cards. I hear that canceling credit cards is bad for your credit rating. Should I really keep these 7-10 cards even though I'm only occasionally using one at most? Is there some method, timing, or situation where I should cancel / close out old, unused credit card accounts to improve my credit rating?

(I'm not physically keeping most of the cards anymore, but the accounts are still alive.)

I'm not interested in financial advice on using credit cards, signing up for new credit cards, or other aspects of my credit. I have gotten my credit scores and am doing perfectly fine, but like any geek, I'd like to perfectly optimize for the absolutely best score I can get.

posted by davebug to Work & Money (17 answers total)

I think the exact formula used to calculate your credit score is not fully known, but the key factors are (1) how long you've had the account (longer is better) and (2) how much of your available credit you are using.

Because of (2), it's a bad idea to cancel paid-off cards IF you are carrying a balance on others. It raises your debt incurred/credit available ratio. But if you aren't carrying balances on any of them, my understanding is that your score will not be noticeably harmed by canceling all but your two or three oldest accounts.
posted by Pater Aletheias at 8:51 PM on March 26, 2009

Response by poster: I've had all of these cards for minimum 2 years, and for most closer to 10. It is rare for me to carry any balance over to the next month. (Perhaps 2 months a year I'll have a small balance.)
posted by davebug at 8:59 PM on March 26, 2009

Cancel them and keep only one card. If you were to go into a bank today and seek a loan or mortgage, the bank would consider the total of all of your cards, whether or not you are carrying a balance on them, as potential debt. So, if you have 10 cards with 1000 dollar limits, then the bank sees that as a potential for 10 000 debt and that could get you denied. Your credit rating is much better without that many credit cards in your pocket. All you need is one well managed card.
posted by scarello at 9:26 PM on March 26, 2009 [2 favorites]

scarello, that is 180-degrees off of what I understand about how it works.

And, additionally, I have credit card capacity nearly as large as my yearly salary; despite this, my last realtor said I had the highest credit rating she'd seen in quite a while.

Are you basing your claims on inside experience with the banking/credit-rating business?

davebug, according to everything I've heard, DO NOT CANCEL CARDS. In addition to the points Pater Aletheias made, there is the chance that your voluntary canceling of a card will be misrecorded in your credit report as a closure by the bank. This happened to me on my last card cancellation. It can be fixed, but it takes watchfulness & effort.
posted by IAmBroom at 9:39 PM on March 26, 2009 [1 favorite]

Cancelling your card can impact your credit score significantly. We actually just did a post on our credit.com blog talking about top credit score myths, and this one ends up hurting a lot of people. It's true that banks (and credit bureaus) consider totals, but they also consider age of account, so cancelling older accounts can be problematic.
posted by judith at 9:44 PM on March 26, 2009 [1 favorite]

A mortgage lender isn't going to look at just your score. So while making your score as high as possible is a great idea, it's not the only thing you need to do if you're looking at getting a mortgage. My suggestion is to not bother closing accounts unless you are planning to apply for a mortgage, and then talk to your mortgage broker and see what he or she recommends.
posted by kindall at 9:47 PM on March 26, 2009 [1 favorite]

The big risk I have heard/read of is going around closing cards right before you go in to get a mortgage or car loan, thinking that you are "cleaning up" your credit, when in fact you will take a short-term hit on your score.

Do you have any plan for needing access to credit in the next year or two? Buying a house? a car? If no, I would cancel the cards now, and by the time you need to put your score to use, your score will have rebounded.

This strategy doesn't necessarily satisfy your score-optimization need, but unless you are going to use your score, who cares?
posted by misterbrandt at 9:59 PM on March 26, 2009 [1 favorite]

scarello, that is 180-degrees off of what I understand about how it works.

And, additionally, I have credit card capacity nearly as large as my yearly salary; despite this, my last realtor said I had the highest credit rating she'd seen in quite a while.

Are you basing your claims on inside experience with the banking/credit-rating business?

Go to any bank and they will count your credit cards as potential debt when considering a loan. Its been like that for as long as I have done business with the banks and I doubt it has changed. And as to your own excellent credit rating, well that's less to do with the size of your credit limit, and more with the fact that you probably pay your bills. Or better yet, if you carry a balance from time to time.
posted by scarello at 10:01 PM on March 26, 2009 [1 favorite]

Best answer: Yes, older accounts are better for your credit score. But closing them doesn't make them go away; they stay on your report for 10 years or more. The hit you take on your score when you close cards has to do with the percentage of credit you're utilizing; say you have 10 cards each with a $1000 limit and you are using $1000 of your total available credit. That means you are at 10% utilization overall. Now if you close all but two of those cards, and you still have $1000 balance, suddenly that's 50% utilization. That's where the immediate decrease in your score comes from when you close credit cards.

Eventually, when those closed cards do fall off your report in 10 years, yes, that will decrease your score because your average age has decreased. But hopefully by then your credit file will be thick enough that it won't matter much.

If I were you, I would close a few of the ones you KNOW you will never want to use again. For me that would be store cards; I get better deals on regular Visa/MC/Amex/Discover cards than I do on store cards, so I don't see much value in keeping those beyond their initial usefulness.

But I would keep the 3 or 4 with the best interest rates, or highest credit limits, or best rewards or whatever. And try to keep a mix -- maybe one Mastercard, one Visa, one American Express and close the rest. Besides, credit card companies DO close accounts for inactivity -- some after only a few months, but some take a year or two or three -- and it does look better on your report if it says "closed by consumer" than if it says "closed by credit grantor" if a potential creditor does a manual review of your credit report. So unless you're willing to charge something on them every few months to keep them from being closed, be proactive and close the ones you don't need and don't use.
posted by rabbitrabbit at 10:40 PM on March 26, 2009

How to cancel a credit card -- the right way

Cancel a card, hurt your credit score "What scoring models want to see, a good utilization rate". Sorry, scarello. If FICO wasn't what lenders wanted, it wouldn't be universal. Banks would probably be concerned if a lot of that were new credit, or of a concerning sort, but good payment history and low balances work together to show responsible utilization. They're also looking at DTI.

Closing credit card dings credit score (3pp): "There really is never any good reason to close an account."

The cost of maintaining a credit card with a zero balance is probably the only good reason to cancel one. But just by threatening to close you can probably get fees waived.
posted by dhartung at 11:28 PM on March 26, 2009 [2 favorites]

scarello, that is 180-degrees off of what I understand about how it works.

I have to chime in here and say that is exactly what I found out at the bank not that long ago. I still got what I wanted, but my account manager flat out told me that because I do have a number of credit cards with high limits (I have 5 cards total, two of which I can put 5 figures on), even though they are sitting with low or no balances on them, they're considered a way for a person to get into trouble in a hurry with little or no oversight.
The takeaway summary was the bank wasn't all that thrilled about the idea I could go absolutely mental on a spending spree and dig a deep hole without them even getting a whisper of it happening until it was far too late.
posted by barc0001 at 12:49 AM on March 27, 2009 [1 favorite]

This is a great summary of what goes into a credit score. A high score will reflect:
-long, dependable payment history
-a variety of loan types
-no big negatives like bankruptcies
-a low credit used/credit available ratio on your cards.

So, keep your oldest cards and highest-limit cards, for sure. The rest probably aren't making too much of a difference.
posted by almostmanda at 1:35 AM on March 27, 2009

And as to your own excellent credit rating, well that's less to do with the size of your credit limit, and more with the fact that you probably pay your bills. Or better yet, if you carry a balance from time to time.

Carrying a balance does absolutely nothing to improve your credit rating.
posted by oaf at 4:39 AM on March 27, 2009

Take a look at Ramit Sethi's book:

I Will Teach you to be Rich

which has a section on dealing with credit cards, including the questions you are asking.
posted by chiefthe at 4:51 AM on March 27, 2009

To reiterate what many have said, banks will consider your total of all your credit cards' limits as potential debt and will take this into consideration when you apply of a loan. The reason for this is that if you take a loan from a bank and the monthly payment is 1/3 of your income, then the next day rack up credit card debt with monthly bills of 2/3 your income, you will have a problem paying your bank and the bank may loose money.

Also, as other have said, while the total limit of your cards may or may not effect your credit score, banks definitely take the total limit of all your cards into consideration when approving a loan.

Credit scores and what banks consider when approving loans are two different things.
posted by bdc34 at 6:36 AM on March 27, 2009

When I was getting approved to buy my house, I had a few sign up and get a few free tee shirt cards from college. I was told that the more available lines of credit you have the more it can hurt you, regardless of credit score. If you have 10k in available credit that is 10lk banks won't be able to lend you. If you have never used them and they are paid off close them. I keep two cards open. That is all you need.
posted by Mastercheddaar at 6:49 AM on March 27, 2009

I have had banks care that I had a lot of high-limit credit cards (mainly small credit unions) and I've also had banks not care at all that I have credit limits that are more than twice my annual salary. I would not close a card because I think that's what a bank would want. I would close a card ONLY if I was told to do so as a condition of getting a loan.

Datapoint: I bought a house last year and nobody cared at all that I had lots of available credit. They did care about inquiries that I had on my report from when I opened up bank accounts, and I had to write a letter telling them that I had not opened any new credit accounts. But all the credit cards I already had, my mortgage people didn't even blink at that.
posted by rabbitrabbit at 8:43 AM on March 27, 2009