Closing Paid Off Credit Card Accounts
I’ve been diligently working my debt snowball plan and it is beginning to yield results. All but one of my credit cards have been sliced and diced, but all of the accounts remain open with each issuer. My initial plan was to close them all, but I soon discovered that gave me little negotiating leverage with the lender in the event of a rate hike or fee assessment. Now I wonder if I should close them as they are paid off or simply leave them open to continue a positive report to the credit bureaus. Here are some points for and against leaving the accounts open.
Closing older credit accounts may hurt your FICO score. If you have read any of my previous articles on FICO, you probably recognize that I am not a big fan of the Fair Isaac scoring model. Having said that, I do not go around trying to intentionally do things to bring my score down. Length of credit history is a component of your FICO score, so it makes sense to leave older credit card accounts open even if they are paid in full with a shredded card. It may make sense to close newer trade lines that were opened to transfer balances, etc. and paid off in short order. Newer, active lines of credit drive down your average length of credit history and negatively affect FICO.
Too much open credit line can also be a problem. Open credit card accounts with a huge credit limit may be viewed as a liability to potential lenders, especially mortgage companies. If you have five or six cards with high credit limits (around $10,000) you have the potential for a $60,000 credit card debt. Sure, you may not be the type to run out and max the cards, but how does a mortgage lender know you won’t do it as soon as the ink is dry on your new home contract? The best strategy in this situation may be to simply have your credit limits reduced voluntarily by contacting each card company, or simply close out two or three of your newer accounts and leave the older accounts open.
Leave one account open if you have the discipline to use it wisely. Unless you are planning to apply for a mortgage or home equity line in the near future the best bet may be to simply close all of your accounts as they are paid in full, with the exception of your oldest card with the highest limit. Keeping one account open and using it occasionally will continue to boost your FICO score. However, if you are one of those people lacking the discipline to carry a credit card without using it for frivolous spending you’re better off canceling all credit card accounts and moving to a cash-only plan.
If you are like me, and went a little overboard with credit cards at an early age, you might want to consider a low-interest consolidation loan to group your debt at a lower rate. If you go this route, cancel all but one credit card, and consider lowering the credit line down to a manageable level. If you don’t, you could wind up with a consolidation loan and more credit card debt.
I’ve got one debt gone on my snowball, and then next dissappears next month. They’re small school loans though, not credit… My plan with the credit cards is to leave them open for the time I’m paying them off, and then closing the newer ones. By the end, I should have maybe 3 or 4 cards total; a couple really old ones and one or two I use day-to-day for the rewards. I’ll let you know when I get there. =)
[...] off the account in short order. Against my desires to tell them to take a flying leap I decided to keep the account open as closing the account would reduce my total credit line and could potentially send my FICO score [...]