FICO Facts

According to FICO, closed accounts with zero balances stay on your credit report for approximately ten years. Other positive credit card information, like timely payments and diverse accounts, will always remain on your report as well.  However, closing credit card accounts to boost your score is a bit of a myth because unused, available credit can significantly help.

So cancelling your dormant department store credit card may actually work against what’s known as your credit utilization ratio. This percentage looks at how much credit you’ve used from your available credit. The FICO system favors the lower ratios because a closed account increases this percentage and chips away at the credit you’re able to use.

History Matters

The length of your credit history is approximately 15% of your overall credit score. It will only help to keep your oldest cards open because they are the best reflection of your payment patterns.

Closed accounts will remain in your credit history for about 10 years. If you’ve cancelled a credit card you held for 20 years, your credit score may shift when the 10 years expires and lenders are missing a big part of your overall borrowing habits.  To put it simply, a shorter credit history can translate to a lowered score.

Choosing Which Cards To Close

While having multiple credit cards that you pay off can benefit your score, be sure that you aren’t dealing with a handful of revolving debts.

More than seven balances in your current history will not help your FICO score. For example, if you have two car loans, student loans and a mortgage, you should consider having no more than 3 credit cards.

Not only is it hard to juggle these finances, but it’s easier for fraudulent use to slip through the cracks if you aren’t paying close attention to every transaction.

If you’re looking to trim the number of cards you own, consider cancelling these first:

• Cards with high interest rates. Sometimes the price of keeping a credit card open monthly outweighs any potential rewards offered.
• Cards that may tempt you into excessive spending. It may serve your credit rating better in the long run to prevent debt from entering the picture.
• Cards that you want to transfer a balance from. If you’ve found a balance transfer credit card that gives a zero or low introductory rate, it may help you get better control of your spending than your current card’s rate.

Card Cancellation Pointers

It’s important to be thorough in your credit card cancellation process. The last thing you need is to be caught off guard by extra fees and other mistakes that can cost you.

• Pay off the balance. The issuer won’t allow you to move forward in closing the account without paying the money they’re owed.  If you can’t pay it off immediately, consider a balance transfer with lower interest rates.
• Turn off your automatic payments. Forgetting this crucial step may cause you to have to deal with the hassle of potential fees associated with the red tape of returned funds.
• Ask your creditor about the terms and conditions of closing accounts. If you cancel before a specific period of time has passed, there may be an early cancellation fee.
• Reap your rewards. They were a big decision factor in having the card in the first place, right? Don’t cancel until you’ve collected. Maybe you wanted to reach a certain benchmark of your rewards points before you cancelled. In this case, you may need to evaluate the price of holding on to the card to get those rewards versus cutting your losses without them.
• Don’t close a credit card and then apply for a loan. Closing an account with a high limit and keeping the rest of your balances appears like you’ve maxed out to a lender.

Cancelling credit cards to curb spending is one thing, but remember it won’t work as a shortcut to boost your score.