Dear Credit Card Adviser,
I was wondering about closing credit cards. You say that you shouldn't cancel them, but if you're not using them, do the creditors close them after a certain amount of time? Then that doesn't hurt your credit or how does that work? I have been trying to decide what to do with the cards. I don't want to close the cards that I don't use if it is going to hurt my credit. I think I have probably shredded those cards even. So I wouldn't be able to use them anyway.
Your credit card issuers may target your inactive accounts for reduced limits or closure, though at what point they take action will vary. The fact is, a dormant account makes zero money for the issuer.
Case in point: Some 24 million people saw their credit card limits reduced between October 2008 and April 2009, according to a study released last August by FICO, the firm that created the FICO score. This group tended to have low balances or inactive accounts.
If your account gets the ax, your score may go down as a result. It doesn't matter who demands the closure. Your score won't suffer more or less because the creditor initiated the break-up.
An account closure can alter your utilization, which is your balance-to-limit ratio on revolving accounts. Shutting down an account with a zero balance removes the credit limit from this calculation, which can cause an increase in utilization. For example, let's say you have two credit cards, each with a $5,000 limit. One you never use, and the other has a $3,000 balance. If you close the dormant account, your overall utilization would go from 30 percent to 60 percent.
Because utilization is a heavily weighted factor in credit scoring models, a surge in this ratio can push the score down. If you paid down other balances or already had a low utilization ratio, you can minimize the impact.
An account closure would also cost you the payment history associated with the account when it comes off your credit report. Closed accounts don't usually get deleted immediately, but they won't stay on longer than 10 years. You generally don't want to cancel your oldest card, because its disappearance from your credit report could shorten your credit history and lower your score.
For the above reasons, I don't recommend closing credit card accounts without a good financial reason to do so. That said, I realize that most folks won't keep every card they've ever opened. So, here are a few recommendations for those times when you must dump a card:
- Spread out closures over time so that your utilization doesn't spike.
- Keep your oldest account open to preserve credit history length.
- Keep cards with high limits open.
- Don't close down credit card accounts right before applying for a loan.
Also, scores reflect current monthly balances, so if you can pare down debt (or charge less if you pay in full) on other cards after closing an account, your score can make a speedy recovery.
If you decide you want to keep your dormant cards, you need to dust them off and charge something on them. I would use them to pay for goods or services you needed anyway at least once a quarter and then pay the balance in full when you receive the statement. If you misplaced the cards or shredded them some time ago, call the card companies and request replacements.
In addition, open mail from all your card issuers in case they contain announcements about annual or inactivity fees. These fees aren't widespread yet, but several issuers have tried them out on existing customers. Bank of America and Citi will add annual fees to some accounts this year, while Fifth Third Bank now applies a $19 inactivity fee if the cardholder doesn't make at least one annual transaction.
Read more columns by the Credit Card Adviser. To ask a question of the Credit Card Adviser, go to the "Ask the Experts" page, and select "Credit Cards."
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