May
25
2011

Consider entire financial picture, not just credit scores, when deciding whether to close accounts

Dear Experian,

I have many small revolving store credit cards with no balance on them. How can I close them without it hurting my credit?

- ENB

 

Dear ENB,

When you close an account you reduce your available credit limit. That makes it appear that your balances are suddenly a higher percentage of your limits, which is a sign of risk. Also, any significant change in the way you use credit can cause scores to decline. So, closing the accounts may have a negative impact on your credit. However, you might not need to be concerned about any negative impact for a number of reasons.

First, the impact of changing the way you use credit by closing accounts is usually temporary. Scores usually rebound in a relatively short period of time if you continue to use your remaining accounts well.

Second, if you are not planning to apply for credit in the near future, you probably won’t be affected by the temporary dip. Credit scores are only important if you are applying for credit. By the time you need to apply for new credit, your scores may have returned to their previous level or perhaps even better.

Third, if you have a strong credit history, which is reflected in strong credit scores, the negative impact of closing the accounts likely won’t impact your ability to qualify for credit or cause you to fall into a category of higher interest rates.

Fourth, if you are having difficulty managing your existing debts, which would be reflected in already marginal or poor credit scores, closing the accounts will remove the temptation to make charges and take on additional debt, when you can least afford to do so. In which case, you should probably close the unused credit cards regardless of any impact on your credit scores.

There may be good reasons to keep the accounts open, as well.

If you are planning to make a major credit purchase soon, you should probably keep the accounts open to avoid increasing your utilization ratio on your remaining accounts and avoid any sudden change in your credit picture.

Some of the accounts might also offer benefits you find valuable, such as discounts on purchases, airline miles or cash back. It might be worth keeping those cards open, even if you decide to close other accounts.

The bottom line is that you should consider your overall financial situation, not just credit scores, when deciding which accounts to close and which to keep open.

Thanks for asking.

- The “Ask Experian” team

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