Before deciding to close or leave a card open, do the math

This post originally appeared February 25, 2016 on CreditCards.com as “Credit utilization rules for managing your credit score”

By Barry Paperno

Dear Speaking of Credit,
Good morning, My credit score is 739 and I have a total of 12 credit cards in my history; however, I only use four cards out of the 12. I just want to know if it will hurt my credit if I leave the cards that I don’t use open with a $0 balance or should I close them? Also, my average age of credit history is poor. How can I improve my status and how long do you advise I should wait just in case I would like to open another card or finance a car or house? — Jennifer

Dear Jennifer,
As you’ll see, one benefit that goes along with good credit — which is what you have with a 739 score — is that you have more freedom to open and close cards without the harm that can befall someone with a lower score. And while it’s hard to find many facts about credit scoring that are true for everyone, regardless of their score, there are at least a couple I’ll apply here:

  • Leaving cards with $0 balances open will never hurt your score.
  • Closing cards, with or without a balance, will never help your score.

This then answers “no” to your question of whether leaving $0 balance cards open will hurt your score. But what about closing some of those cards? This is where, as with most credit scoring questions, the answer can get a little more complex.

Conventional credit scoring wisdom tends to oppose closing credit cards under any circumstances. The basis for such thinking is that when you close a card you eliminate that card’s available credit (credit limit) from the credit utilization calculations (total balances/total credit limits = utilization percentage) that make up almost 30 percent of your score. With lower total available credit in this equation (the denominator) and the same total balance (the numerator), you’re likely to see a higher utilization percentage, and a lower score.

While the many factors affecting a credit score make it impossible to accurately pinpoint just how negatively your score may be impacted by an increase in your credit utilization, we can at least know before closing a card how much of a rise in your utilization percentage to expect. Here’s how:

  1. Add the card balances from your latest statements to make up the “total balances” amount.
  2. Add the credit limits for all of your open cards, whether with or without balances, to make up the “total available credit” amount.
  3. Divide your “total balances” by your “total available credit” to arrive at your “utilization percentage.”

You now know your current combined credit utilization before closing any accounts. Next, determine how much your utilization will increase once cards have been closed by re-calculating your utilization percentage without the available credit currently provided by the accounts to be closed.

The following examples will show you how to conduct such a comparison while also illustrating how higher utilization percentages can see proportionately higher increases from account closures than lower current utilization percentages. This is good news for you, since, to have achieved a score of 739, your utilization must already be relatively low.

Example 1. Using three open cards and their credit limits, we first look at the higher and lower utilization percentages that can result from higher and lower balances.

Example 1: Three cards
  Credit limit High balances High utilization Low balances Low utilization
Card A  $750 $500 67% $50 7%
Card B $1,200 $1,000 83% $100 8%
Card C $1,500 $0 0% $0 0%
Total $3,450 $1,500 43% $150 4%

Example 2. Upon closing Card C and eliminating its credit limit from the calculations, it becomes clear that the existing higher total utilization percentage increased by a much higher proportion than did the total lower utilization percentage.

Example 2: One card closed, leaving two active cards
Credit limit High balances High utilization Low balances Low utilization
Card A  $750 $500 67% $50 7%
Card B $1,200 $1,000 83% $100 8%
Card C $0 $0 0% $0 0%
Total $1,950 $1,500 77% $150 8%

Compare the two “total” lines: Closing Card C caused a 34 percent jump in utilization (43 percent to 77 percent) if you carry high balances when you close the card, while causing only a 4 percent increase (4 percent to 8 percent) if you have low balances when you close the card.

The take-away here, for you and other consumers with good scores who already have low balances and low credit utilization, is that closing cards should have minimal impact to your utilization and your score.

Despite being the biggest immediate concern, utilization isn’t the only consideration that should enter the picture when looking at overall scoring impacts from card closures. When accounts are closed, there are also some long term consequences to the “length of credit history” scoring category that makes up 15 percent of your score. This is the category that includes the “average age of credit accounts” factor, which you confess to being “poor.” To the score, this means “short,” since longer is always better when your length of credit history is being evaluated by the scoring formula.

While closed accounts continue to contribute to your length of credit history calculations for as long as they appear on your credit report, you can expect $0 balance/closed cards to fall off of your credit report within about 10 years after closure. And with each one goes at least 10 years of credit history from your score, which can drop your score.

As for how long you should wait before applying for new credit, considering that you’ll continue to pay on time and not increase your utilization:

  1. Your current score of 739 should already qualify you for a card (though, with 12 already, do you need another?) or a car loan.
  2. You’ll want to have at least a 740 score for a mortgage; so, stay on the safe side by waiting about six months before applying for a mortgage.
  3. Prior to applying for a mortgage, don’t apply for any new credit for at least six months beforehand.

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