Understanding How Often You Should Close a Line of Credit

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Your credit score is a tricky and often confusing subject. One subject of confusion for many people is how often--if ever--you should close a line of credit. Because it can affect your overall credit score, it's important to understand how credit scoring works before you cancel a credit card. 

Credit Score and Account History

There are two main ways closing your credit can affect your overall credit score. According to FICO.com, one of the more commonly used credit scoring systems in the US, the length of your credit history accounts for 15% of your total score. If you have a credit card you never use that's also your oldest account, closing that card could drop your score a bit. 

Credit Score and Amounts Owed

The overall amount you owe on your credit cards makes up 30% of your total credit score. It's not a bad thing to have lines of credit and owe money on them; however, your score will take a nosedive if your lines of credit are at or near their limit. It will also lower if your total amount of available credit goes down. Financial experts recommend you only use about 30% of your total available credit. Anything beyond that, and your score might be affected. 

For example, let's say you have a two credit cards, both with a $1,000 limit. One card has a $0 balance, while the other has a $500 balance, giving you $2,000 of available credit. This puts your overall credit utilization at 25%, which is well within the recommended amount. Because you don't use the card with the $0 balance, you cancel it. Now, your overall available credit is just $1,000, and since you still have a $500 balance, your credit utilization is now 50%, well over the recommended 30%. As a result, your score will most likely be negatively impacted. 

When to Close Accounts

Most financial experts recommend that you keep accounts open. In most cases, they're not going to hurt your score and may even help it. A few times you should close a line of credit include: 

  • You don’t like the card or terms of service. If you don’t agree with the terms of service or if your card rewards just aren’t as great as you thought it would be, you may be better off canceling it and replacing it with one that will provide you more benefits. Make sure you read credit card reviews before opening another account so you end up with a card you’re happy with.
  • The card includes an annual fee. There's no reason to pay an annual fee on a card you no longer use. Cancel lines of credit that don't have a balance if they are charging you a fee, then use that money to pay off existing debt. Some cards also charge inactivity fees, so be sure to check your balance on cards you don't use. 
  • You're tempted to overspend. Paying off a credit card is a great accomplishment. However, if you're tempted to use your credit card after you've paid it off, you're probably better off canceling the card and risking a small dip in your credit thank overcharging it. 

You may be able to cancel a credit card online, but you should always call Customer Service to follow up, and ask for confirmation in writing as well. 

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Please note your financial situation is unique and our tips & advice presented here may not be appropriate for your situation. CreditCardXpo.com recommends that you seek different advice & opinions from your own accountant or financial adviser who understands your individual circumstances before making any important decisions or implementing any financial strategy.