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If you opened your first college credit card to get a free t-shirt or went to the same bank as your parents, you might not find much value in that card anymore. There is a chance that you may even consider closing your credit card – but should you?
Experts often warn against closing a credit card, especially the oldest one, as it can have a negative impact on your credit rating. Before closing your credit card, think about the potential effect.
Below, CNBC Select spoke with Rod Griffin, senior director of consumer education and advocacy at Experian, to understand if closing your oldest credit card, or any card, is a good idea idea.
Closing a credit card may not have the serious negative effect you think it will have. “While your scores may initially decline after you close a credit card, they usually bounce back within a few months if you continue to make your payments on time,” says Griffin.
The main reason your score may go down is because you lose a credit limit and increase your usage rate. “When you close a credit card account, you lose the available credit limit on that account… it increases your overall credit utilization rate, or the percentage of your available credit that you use,” Griffin explains.
An increased usage rate is a sign of risk for lenders because it means you are using up a large portion of your total available credit.
For example, let’s say you have two cards:
- Card A: $ 6,000 credit limit, $ 1,500 balance
- Card B: $ 4,000 credit limit, $ 1,500 balance
To calculate your usage rate, divide your total balances by your total credit limits and multiply by 100.
Here is the calculation: ($ 1,500 + $ 1,500) / ($ 6,000 + $ 4,000) x 100 = 30%
Now, if you decide to close Card A and keep spending a total of $ 3,000, your usage rate will increase dramatically. A $ 3,000 balance on Card B with a $ 4,000 credit limit would equate to a whopping 75% utilization rate.
Here’s the math: $ 3,000 / $ 4,000 x 100 = 75%
Experts generally recommend maintaining a 30% utilization rate, but “in general, the lower the rate, the better,” says Griffin. “The overall increase in your usage rate is the most important thing to consider when trying to decide whether to close an account.”
Another reason that experts recommend against closing your oldest credit card is that the average age of your accounts will decrease. However, Griffin says this is a common misconception: “Even after closing a credit card, the information about how you handled that account will remain in your report for 10 years from the closing date. “
And the average age of your accounts is significantly less than your usage rate. “If you have an established credit history, closing an account with an older history will usually be cleared by your remaining accounts within a relatively short period of time,” Griffin explains.
“A temporary decrease in scores shouldn’t stop you from closing a credit account, because there are times when it makes sense to do so,” says Griffin.
Here are two times when it may make sense to close a credit card, according to Griffin:
- You pay an annual membership fee which is no longer worth the trouble.
- Your card has a high interest rate.
“Closing the card can be a good decision to protect your long-term financial health, even if it is your oldest card,” says Griffin.
At the end of the day, you have to look at the long-term picture and ask yourself why you want to close the card. If it’s a no annual membership card, as the Citi® Double Cash Card, and you pay off the balance in full every month, so there’s really no harm in keeping it open. But if you have high annual fees or credit card debt which incurs high interest charges, consider closing the card.
Before closing a credit card, be sure to pay off any balance or transfer the debt to a balance transfer card, as the Discover it® balance transfer, to benefit from an interest-free introductory period. Although some card issuers allow you to close your account at new fees while you pay off a balance, we recommend that you pay it off in full to avoid forgetting about debts and fees.
If you want to assess the extent to which closing a credit card may affect your credit rating, think of online score simulators, such as CreditWise by Capital One. For example, the CreditWise simulator lets you see how certain actions, such as closing a credit card or paying off a balance, can impact your credit score.
When I simulated the impact of closing my oldest credit card on my credit score, it only showed a decrease of one point from 808 to 807. Keep in mind that the exact effect on your credit score may vary.
If you’re considering closing a credit card account, Griffin recommends that you first ask yourself, “Why do I want to close this?” This can be due to annual fees or high interest rates, as we mentioned above.
If you’re looking to get rid of an annual fee card, consider asking your card issuer for a retention offer, as I did last year with my American Express® Gold Card. This may include removing or reducing your annual fee, or offering cash back, points or miles to help compensate for it.
And if you have a card with a high interest rate and high debt, try calling to apply for one. lower interest rate. If you have relatively good story and always do your minimum payment in time, your card issuer may be willing to work with you. After all, it never hurts to ask.
Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.