Closing out one of your current cards to accommodate another may make good economic sense, but it also can have a downside. Closing out a card you have had for a long time may cause a temporary dip in your credit rating. Some card holders opt to hold onto their old, established cards rather than swap for a lower-interest option because of that reason.
However, experts at Experian, one of the three big credit bureaus, say that excessive concern about the effect on your credit rating should not be the exclusive reason for not changing cards. It is one of the factors you should consider, but there are others.
Credit bureaus look at a range of factors when they create a score for you, said Experian’s Rod Griffin.
Credit utilization is one of the factors. That means how much of your available credit you are actually using. If you have four cards, each with a limit of $5,000, you have total credit available of $20,000. But if you have two cards that are about maxed out and no balances on two of the cards, you are only utilizing about 50 percent of your capacity. That’s what the credit bureau looks at. Cancelling one of the cards would have a small impact on your overall score. And if you continue a long-running record of timely payments, it is likely to recoup quickly.
Even so, if you are planning to apply for a home or auto loan or any other in which your credit score will be relevant, wait until that transaction is complete before dropping a card, Griffin advises. In general, it takes three to six months for your rating to be affected by the cancellation of a card.
If you are concerned that cancelling a card will immediately eliminate its credit history, don’t be, he says. The credit bureau will include that card’s history in its considerations of your rating for at least 10 years if there is no negative background.
Your next credit report will note that a card was closed at your request, which is not likely to be a red flag for a potential lender.
If you want to evaluate your credit cards and determine if they are all necessary, the questions you should ask include whether or not a particular card is financially beneficial to you. Consider the interest rate, fees, incentives and rewards and make comparisons to determine if you want to eliminate one or more of the cards. Ideally, you will retain only cards that you use on a monthly basis, paying them off in a timely manner.
Occasional pruning is a good idea, particularly if you are carrying a lot of cards that have low limits and relatively high interest. For instance, that card you signed up for in college for the sake of the free T-shirt. As your credit history matures, you have more leeway for low-interest cards that offer more incentives.
