Should You Close Out Old Credit Cards?

Recently I've had a lot of clients tell me they are holding onto old credit cards because they've heard closing them out would impact their credit score, negatively. 

As a result, I'm finding that people have a lot of older cards just hanging around that they don't ever use. 

Is this wise, or just cluttering up your finances? 

Let's first take a look at what affects your credit score...

What Factors Affect Your Credit Score?

1. On-Time Payments

Making payments on time is crucial. You don’t have to pay off the entire balance to improve your score—simply making at least the minimum payment on time has the largest impact on your credit.

2. Length of Credit History

This is where people get afraid to close out old cards (but hold out and read to the next point, as these are related!) If you don't have any credit history or a very short period of credit history (for example, you just got your first credit card ever, 6 months ago) it will be hard to get approved for additional loans until you build up more length of time and experience managing payments. Creditors want to see that you can demonstrate the ability to make timely payments and manage your credit over longer periods. For example, if you have 3 credit cards and let's say two of those were opened just in the last few months but one of them has been open for a few years, don't close out that one card with ALL the history on it. That could hurt your score. But if you've got 5 credit cards and two of them were old cards you opened years ago when in college and you don't use them, but the other 3 you use regularly and have had those for a couple of years already, then you can close out those old college cards. Because the ones you are keeping still have enough history on them to keep you afloat. Make sense? Good, read on to the next point!

3. Max Credit Extended

Any card you have open, even if unused, still represents available credit. Having too much available credit can make lenders nervous, as it suggests you could quickly max out all your cards. If you have a lot of open cards, especially if you are not using them, it could hurt you from getting approved for something you do actually want. 

4. Debt-to-Income Ratio

Lenders also consider how much debt you carry compared to your income. A high debt-to-income ratio can hurt your score and reduce your chances of being approved for new loans.  The general rule is to keep total debt below 36% of your gross income. Keep in mind, this includes all debt not just your cards. 

5. Credit Utilization Ratio

Your credit utilization ratio—how much of your available credit you're using—is another key factor. Another thing that can hurt your credit score is if you consistently hold a balance on your cards that is more than 30% of the total credit limit. This is known as your credit utilization ratio. To provide an example, if your credit limit on one card is $10,000, try not to accumulate more than $3000 on it at any one time. Now, in reality, most of us probably have a hard time doing this. If you charge up more than 30% of the cards limit it's not the end of the world, this just one of several factors that play into your overall score! 

So When Should You Consider Closing Old Credit Cards?

If you’ve built up a solid credit history and have multiple cards in use, closing out unused cards may not negatively impact your score. However, if the card you're considering closing is your oldest one, you may want to keep it open to maintain that long credit history.

Balancing Your Credit Management

It's important to weigh all factors when managing your credit. If you're unsure, a financial professional can help you evaluate whether closing cards fits into your broader financial strategy.

To sum things up, there are situations where it might make sense to close out credit cards you are not using and consolidate. 

There are many factors that affect your total credit score so the goal is to balance it all out. 

Working with a financial professional and putting together a Financial Life Plan® can help you manage credit sensibly within your bigger financial picture! 

If this topic resonates with you let’s take that next step and speak over a 15 minute right fit call.