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Which Credit Cards Should I Close?

One of the most common questions I get has to do with the impact of closing credit cards, “Which card or cards should I close?”  Most consumers are aware of the fact that closing credit cards can lower your credit scores but that’s really where the facts end and the fiction begins.  I wrote briefly about the impact of closing credit cards here but the topic deserves a deeper dive so on goes my SCUBA gear.

 Sometimes the relentless pursuit of those great credit scores causes us to do things that might seem foolish or even silly.  Some of these are going to be situations where the smartest move might not be the best move for your credit scores.  Please keep that in mind as you read on.

 First and foremost, if you’ve conceded that you simply can’t properly manage credit cards then you shouldn’t have them, period.  But, if you simply want to prune your wallet of some unused or expensive plastic then there is a right way and a wrong way to go about it.  Each strategy has its pros and cons.

 The Most Financial Benefit

 If you want to get the most financial bang for your buck then rank your credit cards by their interest rate from highest to lowest and then slice off the top card/s.  This strategy, which you didn’t need to hear from me because it’s so fundamental, is only useful if you revolve a balance from one month to the next.  If you pay your cards off each month then the interest rate is irrelevant.

 The annual fee associated with a card can also seem to be a reason for closing it.  But, most annual fees are well below $100 so if you think about the other things you’re spending money on, a credit card annual fee doesn’t seem so bad.  Having access to thousands of dollars of unsecured capital has value.  Remember that before you close cards just because they have annual fees.  You might regret your move.

 The Most Credit Score Benefit

 The above header is purposely deceptive.  There is no credit score benefit to closing credit card accounts.  When you close an account you lose the value of the unused credit limit, which can really slam your scores.  If you close credit cards that have a balance the damage will be less than if you close cards that have no balance.

 If you do choose to close accounts that have no balance then choose the card with the lowest credit limit, which is probably going to be a retail store credit card (those will also likely have the highest interest rates).  Or, alternatively, close charge cards since they have no credit limits and are not counted by newer scoring models in the infamous “debt utilization” category, which is more fully explained here.     

 The Biggest Myth About Closing Credit Cards

 Here goes…”Close the newest card because if you close old cards you’ll lose the value of their age in your credit scores.”  No, no, no.  That’s incorrect.  The only way you lose the value of an old account is if/when it’s removed from your credit reports.  As long as the account is still on your credit reports then the scoring models see how old it is and your scores will continue to benefit from its age. The incorrect assumption is that credit-scoring models only look at open accounts when considering age related factors.

 The Fair Credit Reporting Act doesn’t require the removal of closed accounts that are positive (void of negative information).  We know at least one of the credit bureaus will allow a closed account to remain on file for 10 more years.  Point being, when you’re going through the process of choosing which accounts to close don’t worry about how old they are.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

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