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Credit Card Basics

When to Close Credit Cards with Zero Balance

Dear Experian,

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?

- ABF

Dear ABF,

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 that your utilization rate, or balance-to-limit ratio, has suddenly increased.

How Closing an Account Affects Scores

Your utilization rate, sometimes called utilization ratio, is the second most important factor in credit scores. An increase in utilization is a sign of risk, so closing those accounts may cause your credit scores to dip. However, you should use your good judgment based on your overall financial situation.

If Your Credit Scores are Strong

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.

If you are planning to apply for credit in the near future you might want to maintain stability in your history. In that case, you should hold off on closing any accounts until after you've secured the credit you want.

If You Have Poor Credit Scores

At the other end of the spectrum are people with serious credit problems who already have poor credit scores. If you are having trouble managing the debt you have and these open accounts represent temptation, it may be in your best interest to close them. Why keep an open account sitting there that tempts you to dig yourself deeper into debt?

If Your Scores Are Borderline

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.

Deciding Whether to Close an Account

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.

Closed Accounts Remain on the Credit Report

Even if you decide to close the accounts in question, they will still remain on your credit report for a certain amount of time.

You mentioned that your accounts have a great payment history. Closed accounts with no late payment history remain on your credit report for ten years from the date they are closed. Positive accounts remain longer than negative accounts in order to give you credit for your good payment history.

Thanks for asking.
Jennifer White, Consumer Education Specialist

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