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The first credit card you open typically has no frills and a modest credit limit, but it's an important financial tool as you start to build credit.
When I opened my first credit card, the Citi ThankYou Preferred Card (this card is no longer on the market), in college, it was a good choice at the time. There was no annual fee, and I earned rewards on dining and entertainment purchases. But since then, I opened nine more cards with more lucrative rewards programs, and these days I only use the ThankYou Preferred Card twice a year.
Credit utilization rate is the second most important factor of your credit score, and it represents the percentage of your total credit you're using. For instance, if you spend $1,000 on a card with a $5,000 credit limit you have a 20% credit utilization rate.
If I close my oldest credit card, my total available credit limit would decrease. This could lead to an increase in my utilization rate and potentially a decrease in my credit score.
The lower your credit utilization rate the better. In fact, a FICO study found that "high-achievers" — consumers with credit scores 750 and above — use less than 10% of their total available credit limit.
Another reason I don't close my oldest credit card is because it shows lenders how long I've managed credit. The average length of time you've had credit makes up another 15% of your credit score. If you close your oldest credit card account, the amount of time you've had credit decreases.
For example, I have 10 credit cards, but I've opened most of them in recent years. For instance, I opened the Chase Sapphire Reserve® earlier this year and the Blue Cash Preferred® Card from American Express within the past year and a half.
Every time I open a new card, the average length of time I've had credit decreases. To calculate the average age of your accounts, follow these three steps:
- Add up the amount of time since you opened each card (for instance, a card opened in 2015 equals five years; 2019 is one year; 2020 is zero)
- Add up the number of cards you have
- Divide the total amount of time by the total number of cards opened
After doing this calculation, I found that closing my oldest card, which has been open for five years, would decrease the average length of time I've had credit to roughly 1.5 years.
Closing my oldest card and decreasing the length of my credit history could lead to a drop in my credit score since lenders look at how long you've managed credit. The longer you responsibly manage accounts, the better chances you have at achieving a good credit score and qualifying for the best financial products.
While it's good to keep your credit card accounts open, there are some situations where it may be more beneficial to close your credit card.
- You're paying an annual fee that's no longer worthwhile. When you open a card with an annual fee, the rewards, welcome bonus and benefits may initially be worthwhile, but over time your spending habits can change. For instance, you may find that you're not taking advantage of all the benefits that come with your premium travel card with a high annual fee and it's harder to justify the cost. Therefore, keeping this card open may cause you to lose money.
- Your card has a high interest rate. If you carry a balance on a high interest card, the fees can add up. You may want to consider completing a balance transfer to pay off debt, then close your account and use a 0% APR card for new purchases.
Card issuers can close your credit card account without notice due to inactivity, default or delinquency, so it's important to use your card and not forget about it completely. There isn't an exact timeline for when your account may be closed due to inactivity, so make sure you use the card every few months.
In order to ensure that my oldest accounts remain open, I use them twice a year, once in the first half and then another time toward the end of the year. I charge a small $5 gift card, often to Target, Amazon or Starbucks, since it doesn't matter how large the purchase is.
I also have autopay set up on all of my accounts for the entire statement balance, which ensures payments are made on time and in full.
If you have an old credit card that you don't use anymore, evaluate whether the card is helpful or harmful to your credit score. You may want to cancel a credit card with a high annual fee or high interest rate since it can cost you more money in the long-run.
However, if you have a no-annual-fee card like I do, consider keeping it open. When you use it properly, it can help you maintain a good credit score.
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