How Long Should You Keep a Credit Card Open?
Make informed decisions about keeping or closing credit cards. Understand the long-term financial impact and manage your credit effectively.
Credit cards are an integral part of modern financial life, offering convenience and access to credit. Deciding how long to keep a credit card open is a common dilemma, as the choice can significantly influence one’s financial health. Various factors, from the card’s utility to its impact on creditworthiness, require careful thought and understanding of credit principles.
Key Credit Score Impacts
Closing a credit card can influence your credit score through two primary mechanisms: average age of accounts (AAoA) and credit utilization. AAoA is the average length of time all your credit accounts have been open. A longer AAoA is viewed favorably by credit scoring models, indicating responsible credit management. When an older account is closed, it can decrease your AAoA, potentially lowering your credit score. The impact is more pronounced if the closed account was one of your oldest.
Credit utilization ratio is calculated as the total amount of revolving credit used divided by total available revolving credit. Maintaining a low credit utilization ratio, typically below 30%, is beneficial for your credit score. When a credit card is closed, especially one with a substantial credit limit, your total available credit decreases. If outstanding balances remain, this reduction in available credit can cause your utilization ratio to increase, negatively impacting your credit score. For example, if you have $2,000 in debt across cards with a total limit of $10,000 (20% utilization), closing a card with a $5,000 limit would reduce your total available credit to $5,000, increasing your utilization to 40% ($2,000/$5,000).
Strategic Account Management
A strategic approach to managing credit card accounts is beneficial, considering their impact on your credit score. It is advisable to keep older credit cards open, particularly those with no annual fees, even if not frequently used. These accounts contribute positively to your average age of accounts and maintain higher total available credit, helping keep your credit utilization ratio low. Using such cards for small, recurring expenses paid off automatically can help keep them active and prevent issuer closure due to inactivity.
However, closing an account may be considered in certain scenarios. If a credit card carries a high annual fee that outweighs benefits, or encourages overspending, closing it may be a prudent financial decision. Before closing a card with an annual fee, it is possible to contact the issuer to request a product change to a no-annual-fee version of the card, which allows you to maintain the account’s history without incurring recurring costs. If you decide to close a card, consider doing so after its annual fee posts. Many issuers offer a grace period, often around 30 days, to cancel and receive a refund of the fee.
Process for Account Closure
If you decide to close a credit card account, a specific process helps ensure a smooth transition and minimizes negative impacts. First, pay off the entire outstanding balance to zero; a card cannot be fully closed with outstanding debt. Redeem any accumulated rewards or points before closure, as they are typically forfeited once the account is closed.
Next, contact the credit card issuer directly, usually by phone, to formally request closure. Some banks offer online options. Follow up with a written request for confirmation, noting the date, time, and representative’s name.
After confirmation, physically destroy the credit card to prevent unauthorized use. Finally, monitor your credit report in the months following closure to ensure the account is accurately reported as “closed by consumer” and no unexpected balances appear. A closed account with positive payment history remains on your credit report for up to 10 years, contributing to your credit history.