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Topics addressed on June 24, 2009:
Deciding when to close credit cards with zero balance
I am thinking about cancelling a few credit cards that have a zero balance that I don't use but have a great payment history with. How will this decision on my part affect my credit scores?
The standard advice is to keep unused accounts with zero balances open. The reason is that closing the accounts reduces your available credit, which makes it appear your utilization rate, or balance-to-limit ratio, has suddenly increased.
An increase in your balance to limit ratio is a sign of risk, so your credit scores may dip a bit. However, my personal advice is to use your good judgment based on your own situation.
If you have a strong credit history, and therefore, strong credit scores, closing an account, or even several accounts likely won’t have a significant impact on your credit scores. There may be a decrease, but the scores will likely still be good enough to qualify for the best terms. So, the decrease really has no impact on your ability to get the credit you want. This is especially true if you aren’t planning to apply for credit soon, in which case you would want to maintain stability in your history.
At the other end of the spectrum are people with serious credit problems who already have poor credit scores. If you are having problems managing the debt you have, why keep an open account sitting there that tempts you to dig yourself deeper into debt? Consider closing the account so you no longer have that temptation.
Those who are on the borderline in credit score terms have a little bit more difficult choice. Marginal credit scores often indicate a person is close to their limit in terms of the debt they can manage.
If you are in marginal situation, you shouldn’t be taking on new debt. Instead, you should be focusing on reducing the debt you already have. So, if you are open to the temptation of charging more, then close the account.
If you have strong will power and are working to pay down your existing debt, then you may want the open accounts for emergencies such as getting sick or having an accident. When you’ve paid down your debt, you can start saving for those emergencies so that you don’t have to rely on credit and can close accounts you don’t use.
You shouldn’t make credit decisions driven only by a credit score. Instead, you should make decisions based on your overall financial situation, your need for the account and your ability to repay the debt. If you make the right decisions with regard to your overall financial situation, your credit scores will take care of themselves.
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- The "Ask Experian" team