The Biggest Credit Score Myth That Just Won’t Die
Our credit system is incredibly complicated, and a large number of Americans struggle to play by its rules. That’s because those rules are often unclear, and the confusion is only compounded when people are led to believe certain “facts” related to credit that are actually completely false. We largely have the internet to thank for that, but it certainly doesn’t help when even so-called experts tout common misconceptions as the truth.
For the average person who is trying to build or maintain a good credit score, a number of myths about credit that continue to circulate — no matter how hard financial experts try to squash them — make the process difficult and frustrating. And the biggest myth out there is that closing your oldest accounts will hurt your credit score by reducing the length of your credit history.
Will Closing an Account Hurt My Credit History?
Once and for all: No! Many people are afraid to close old revolving credit accounts, like credit cards, for fear that doing so will remove those years of positive credit history. The fact is, closing an account has no impact on your credit history.
Experian, one of the three main credit reporting bureaus, explains:
“Contrary to popular reports, you don’t lose the positive credit history when you close an account. A credit report serves as a record of your account history, so closing an account does not cause the account to be deleted immediately.
Experian retains closed accounts with no negative information associated with them for 10 years from the date they are reported closed. As a result, positive credit information remains on your credit report longer than most negative information, such as late payments.”
How Closing Accounts Affects Your Credit Score
This is not to say that closing an account can’t have a negative impact on your credit score. However, the relationship between open or closed accounts and your credit has nothing to do with how long you’ve had those accounts.
One of the biggest factors that affects your credit score is your credit utilization ratio — a technical term for the amount of debt you owe versus the total amount of credit extended to you. Credit bureaus view a high ratio as a red flag, as using too much credit at one time is a sign you’re financially strapped and in danger of default. A low ratio — having very little debt in comparison to your total credit available — demonstrates that you have no problem meeting your financial obligations.
This means that when you close an account, you’re reducing your available credit while your total debt remains the same, thus raising your credit utilization ratio to a potentially harmful number.
For example, say you have two credit cards: One has a limit of $2,500 and you are currently carrying a balance of $1,000, while the other card has a credit limit of $1,000 with no balance. This means your total debt is $1,000 and your total credit available is $3,500 — your credit utilization ratio is about 28 percent.
Now, imagine you close the card with the smaller limit because you aren’t using it and want to “clean up” your credit. This reduces your available credit to just $2,500 (you still owe a total of $1,000), and raises your credit utilization to 40 percent. It’s recommended that you keep your credit utilization below 30 percent — so by closing this account, your credit score will likely take a hit. Note, however, that you could have owned that credit card for six months or six years; the age of the account is irrelevant.
When Is It a Good Idea to Close a Credit Card Account?
While closing an account rarely helps your credit score, it makes no sense to keep one open simply due to the fact that it’s old. Here are a few scenarios in which closing an old credit card, or other revolving credit accounts, is okay:
- Annual fee: If you’re hanging onto a card that you rarely use or don’t need, and are also paying an annual fee to keep it, you’re just wasting money. As long as the credit limit is not very high, go ahead and close it.
- Spending problems: Some people control their spending better than others — if you regularly struggle with overspending or debt issues and an old credit card in your wallet is more temptation than you can handle, get rid of the card and save yourself trouble down the line.
- You’re debt free: When you don’t owe any money, your credit utilization is zero. At this point, it’s fine if you want to close an account because that ratio will remain at zero regardless of the amount of credit you have available.
Again, you really can’t improve your score by closing an account, and generally, the more credit you have to your name (that’s not being used, of course), the better your credit profile looks. That’s why it’s usually best to go ahead and keep your accounts open, unless there’s a reason like one of the above that would make closing an account a smart move. Know that in any case, though, you can’t negatively affect your credit history by closing an older account.
It’s unfortunate that myths like this one can cause some people to do more damage than good to their finances. Be thankful, however, that you sought out the facts, and remember that just because something is common knowledge doesn’t mean it’s true.