Congratulations! After doing some comparison shopping, you’ve applied for and received a new credit card with a much better interest rate than your current one. Since you won’t be using that old account any longer, you’re thinking about closing it out.
That’s not necessarily a good idea. To maintain the best credit score, you could be better off not using the card instead of canceling it. Answer these questions before making your decision.
- How long have you had the card you want to cancel? Your credit score is based in part on the length of your credit history. If you’ve had the card a long time, and you’ve kept the account up to date, that contributes to a good credit score. You may want to keep the account open just to maintain that positive report on your credit record.
If you do decide to close the card, you’ll still benefit for a while. According to Equifax, one of the three major credit reporting agencies, information about accounts that you’ve paid promptly should remain on your report for about ten years.
If your history on this card isn’t as good as you’d like, you can close the account. The negative report should come off your credit record seven years after you’ve stopped using the card.
- What is your current credit utilization rate? Your credit score also depends on how much debt you have in relation to the amount of credit that is available to you—your credit utilization. Lenders like to see a low credit utilization number—under 30 percent.
Suppose you have three cards with credit limits of $5,000 on each. That means you have a total of $15,000 in credit available to you.
So if you want to keep your credit score as high as possible, you’re probably better off keeping that old credit card account open to keep your utilization rate low.
- If the total of outstanding debt on all of your cards is $4,500 or less, you’re under the 30 percent utilization rate, and that’s great. ($4,500 divided by $15,000.)
- If your total debt is close to $ 6,000, however, that brings your credit utilization up to 40 percent. ($6,000 divided by $15,000.)
- If you get approved for another credit card with a $5,000 credit limit, you now have $20,000 total credit available. If you keep all four cards—and your debt remains around $6,000—your credit utilization rate goes down to 30 percent. ($6,000 divided by $20,000)
- Close one of the older accounts, and the utilization rate goes back up to 40 percent.
- Can you resist the temptation to use both the old card and the new one? Getting a credit card with a lower rate is great if you carry a balance forward each month—it can help you reduce your monthly payments and your debt over time. But if you find yourself using both the new and old cards, you may start overspending.
If you can’t resist the urge to splurge, you’re better off cancelling your old card. Even if your credit score takes a temporary hit, it’s better than running up debt that you can’t pay off.