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If you have several (or a lot more than several) open credit card accounts, you may think about closing them, even if they are only zero balance cards that you never use. You may feel that getting the zero sum reminder from the lender every month is a waste of paper (or bandwidth, if you have e-billing). There are caveats you should consider before closing your credit card accounts first, however - as doing so might wind up hurting your credit score.
How can having less debt hurt me?
A credit card with a zero balance doesn’t count as debt, that’s why. It counts as potential. When lenders are looking at your credit report in detail, they don’t much consider how many open accounts you have (unless it’s extreme), rather they are paying attention to two factors: The age of your accounts, and How much of your available credit you are using.
Available Credit is viewed as how much you owe versus how much you could possibly owe. For example, if you have seven open credit card accounts and their combined maximum balance is $20,000, that is considered to be your total available credit. Now, how much you actually owe on all of those cards combined is important to consider as well. If you owe $2,000 on one card, $1,000 on another card and $1,000 on a third, then you are considered to be using up 20% of your available credit ($4,000 of $20,000 is 20%). This is considered a good amount - you want to keep your credit usage below 25% of your available credit.
Let’s say, however, that you close two of your credit cards worth a total of $8,000 available credit. Now your total available credit is only $12,000 and you still owe $4,000 on that, which means you’re using 33% of your total available credit - a big no no. Those two closures will have a negative impact on your credit score until (unless) you drop your total monthly credit usage.
Age of your accounts is also taken into consideration. The longer you’ve had an account in good standing, or even one that you don’t use, the more favorable that seems to creditors who come a’knocking on your credit report to see how you’re doing. If you feel the need to close a credit card account, try to close one that is newer than the others and keep your oldest for that little extra credit score boost.
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