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If you opened your first credit card during college to get a free t-shirt or went to the same bank as your parents, you may not find much value in that card anymore. There's a chance you may even consider closing your credit card — but should you?
Experts often warn against closing a credit card, especially your oldest one, since it can have a negative impact on your credit score. Before you close your credit card, consider the potential effect.
Below, CNBC Select spoke to Rod Griffin, senior director of consumer education and advocacy at Experian, to understand whether closing your oldest credit card, or any card at all, is a good idea.
Closing a credit card may not have the severe negative effect you think it will. "While your scores may decrease initially after closing a credit card, they typically rebound in a few months if you continue to make your payments on time," Griffin says.
The primary reason your score may decrease is through losing a credit limit and increasing your utilization rate. "When you close a credit card account, you lose the available credit limit on that account...this makes your overall credit utilization rate, or the percentage of your available credit you're using, increase," Griffin says.
An increased utilization rate is a sign of risk to lenders since it represents you're using a large amount of your total available credit.
For example, let's say you have two cards:
- Card A: $6,000 credit limit, $1,500 balance
- Card B: $4,000 credit limit, $1,500 balance
To calculate your utilization rate, divide your total balances by your total credit limits and multiply by 100.
Here's the math: ($1,500 + $1,500) / ($6,000 + $4,000) x 100= 30%
Now, if you decide to close Card A and continue to spend a total of $3,000, your utilization rate would drastically spike. A $3,000 balance on Card B with a $4,000 credit limit would equal a whopping 75% utilization rate.
Here's the math: $3,000 / $4,000 x 100 = 75%
Experts typically recommend maintaining a 30% utilization rate, but "in general, the lower the rate, the better," Griffin says. "The overall increase in your utilization rate is the most important thing to consider when you're trying to decide whether you should close an account."
Another reason experts recommend not closing your oldest credit card is because the average age of your accounts will decrease. However, Griffin says this is a common misconception — "Even after closing a credit card, information about how you managed that account will stay on your report for 10 years from the closed date."
And the average age of your accounts is significantly less important than your utilization rate. "If you have an established credit history, closing an account with an older history will generally be offset by your remaining accounts in a relatively short time," Griffin explains.
"A temporary decrease in scores shouldn't keep you from closing a credit account because there are times that it makes sense to do so," Griffin says.
Here are two times it may make sense to close a credit card, according to Griffin:
- You're paying an annual fee that's no longer worthwhile.
- Your card has a high interest rate.
"Closing the card may be a good move to protect your financial health in the long run, even if it is your oldest card," Griffin explains.
At the end of the day, you have to look at the long-term picture and ask yourself why you want to close the card. If it's a no annual fee card, such as the Citi® Double Cash Card, and you pay the balance in full every month, then there's really no harm in keeping it open. But if you have a high annual fee or credit card debt that's incurring steep interest charges, consider closing the card.
Before you close a credit card, make sure you pay off any balances or transfer debt to a balance transfer card, such as the Discover it® Balance Transfer, to benefit from an introductory interest-free period. While some card issuers allow you to close your account to new charges while you pay off a balance, we recommend you pay it off in full to avoid forgetting about debt and incurring fees.
If you want to gauge how closing a credit card may affect your credit score, consider online score simulators, such as CreditWise from Capital One. For instance, CreditWise's simulator allows you to see how taking certain actions, such as closing a credit card or paying off a balance, might impact your credit score.
When I simulated how closing my oldest credit card would affect my credit score, it only showed a one point decrease from 808 to 807. Keep in mind, the exact effect on your credit score can vary.
If you're considering closing any credit card account, Griffin recommends you first ask yourself, "Why do I want to close it?" That may be due to an annual fee or high interest rates, like we mentioned above.
If you're looking to get rid of an annual fee card, consider asking your card issuer for a retention offer, like I did last year with my American Express® Gold Card. This may include them waiving or lowering your annual fee, or offering cash back, points or miles to help offset it.
And if you have a card with a high interest rate and debt, try calling to ask for a lower interest rate. If you have a relatively good history and always make your minimum payment on time, your card issuer may be willing to work with you. After all, it never hurts to ask.
For rates and fees of the Discover it® Balance Transfer, click here.