If you have an old, unused credit card lying around, it might seem like a good idea to close the accounts. After all, it’s just one more account to keep track of and there’s always the chance the card could get stolen. While this might seem like a responsible move, it can actually hurt your credit score. One of the easiest ways to maximize your credit score is to keep old accounts open and there are very few situations when you shouldn’t follow this advice.
How old accounts maximize your credit score
Your old credit card helps your credit score in a couple different ways. First, about 15 percent of your score is based on the length of your credit history. The rating agencies measure this by looking at how long you’ve had your credit cards and the longer you’ve had the accounts, the better. Just by keeping your old credit card open, you’re increasing the length of your credit history.
This is true even if the credit card isn’t your oldest account. Part of this calculation comes down to the average age of all your credit cards so any account that isn’t brand new, helps. When you close down the old card, your credit score will decrease because you’re shortening your credit history.
Your unused credit card can also improve your credit utilization rate, which makes up 30 percent of your credit score. Your credit utilization rate is the amount of credit card debt you have versus your total credit limit. The closer you are to your limit, the worse you will do in this category.
An unused credit card helps lower your credit utilization rate if you have credit card debt. Let’s say you have two credit cards each with a limit of $5,000. You have a balance of $2,000 on one card and are thinking of closing the unused, second one. Right now, your credit utilization rate is 20 percent ($2,000/$10,000). Once you close the old card, your utilization rate will double to 40 percent ($2,000/$5,000), which looks worse to lenders and hurts your score.
Keeping your account active
It doesn’t take much work to keep your old credit card active. You just need to make one or two purchases per year. That way, the credit card company won’t cancel your account for a lack of activity. You don’t need to use your card any more than that though.
One easy way to keep the card active is to connect it with one of your monthly bills, like your utilities. Set up your accounts so that the credit card automatically pays the bill each month and then your bank automatically pays off the credit card. That way you’ll keep the account active without having to think about it.
It’s also important to keep an eye on your account even if you aren’t using it much. That way you won’t overlook fraudulent activity or forgot about a payment. Make it a habit to check your statement each month. Another easy way to keep track is to link your credit card to an online budgeting program like Mint.com. These budgeting tools let you see what’s happening with all your bills and accounts in the same place. It’s an easy way to track your old credit cards and see the balances on all of your accounts.
When it makes sense to shut down a card
There is one scenario when it might make sense to shut the card down: if the card charges an annual fee. This would be mostly a waste of money because if you aren’t using the card, you aren’t using the rewards program that you’re paying for.
Now, the program could still be worthwhile if you’re getting some sort of reward just for renewing. For example, many hotel reward cards offer a free night when you pay your annual fee. Basically, the decision whether to keep the account open depends on whether you’re getting enough of a benefit from the rewards. The benefit to your credit score isn’t enough to justify paying the annual fee.
If you do decide to close your old credit card, avoid closing the account right before a lender is going to review your credit score, like when you’re applying for a mortgage or taking out car loan. Closing the card will lead to a temporary drop in your credit score which would lead to higher payments on your new loan. Instead, wait a few weeks until after you’ve taken out the loan and then you can safely close the account.
Most of the time, it makes sense to keep your old credit card active. Keep this advice in mind so you can maximize your credit score.