Credit Score Myths – Don’t Cancel Old Accounts

Credit scores remain all the rage, but there are a lot of misconceptions out there. Four common ones are outlined in this MSN Money article titled ‘4 Credit-Scoring Myths‘. What’s the first myth? That closing credit cards will help your score.

No, no, no. For the umpteenth time: Closing accounts can never help your credit score, and may hurt it… It?s true that having too many open accounts can hurt your score. But once you?ve opened the accounts, you?ve done the damage. You can?t repair it by shutting the account, and you may actually make things worse… The credit score looks at the difference between your available credit and what you?re using. Shut down accounts, and your total available credit shrinks, making your balances loom larger, which typically hurts your score.


Other un-truths mentioned are that checking your credit score hurts your credit, that credit counseling is as bad as bankruptcy, and that you only have one FICO score.

I personally never cancel any of my cards. According the quote having too many open accounts can hurt your score, but I’m not exactly sure how. In my previous post on What Makes Up Your FICO Score?, that’s not listed as a criteria, although it asked as the first question in the Free FICO Score Estimator from myFICO. But I think that question is trying to address credit history length. If it is part of the FICO formula, I think it’s a small part of the score, ’cause I’m now near 20 credit cards and haven’t seen any problems yet. I’m also keeping my debt-to-limit ratio low.

But how to do keep track of all those old cards if you shouldn’t cancel them? I keep a virtual eye on all my inactive cards with Yodlee. As an example, last year I caught this fraudulent charge on a card which I hadn’t used in years. Called it in the next day, and it was all taken care of.

As for opening credit card accounts (for the lovely perks), here’s what she says (and agrees with my own experiences):

For most people, one inquiry will generally knock no more than 5 points off a score (and scores typically run from 300 to 850, so that?s not a big percentage).

Comments

  1. Do you know if closed accounts are used in calculating your average age? Several people have told me that closed accounts are still calculated in the average age but several others told me the opposite.

  2. Yes yoddle is great, it provides this service to the likes of Bank of America and Fidelity. I use Fidelity’s Full View to monitor all of my accounts, checking,savings,CCs, etc etc

  3. As far as canceling old credit cards… I’m not sure how it actually effects your score, but when I was in college I got turned down for a credit card I applied for because I had too much open to buy credit. I didn’t have a balance on any card, but I guess my credit limit was too high on all of them combined. I guess that could be fixed by having the companies lower your credit limits rather than canceling cards though.

  4. More cards = higher security risk

    By the way, you’ve never got an official FICO score yet… Plus, mortgage lenders may be worried about your available credits one day… who knows…

  5. yeah closing an account will affect your credit, but if you have a lot of cards and no major purchase to do for a year or so I think it would be wise to close those that you don’t use just for maintainance purposes. I personally have only 1 card now for emergency purposes only and so does my wife, I closed my other cards a few years ago after buying our first house and after killing our debt but yes it went down a bit but went back up again especially with the payments on the house.

  6. What about bank accounts? I’m a newbie to the credit score game and recently opened another an account after reading about a $50 promo on FWs, also a newer deal for $100 or $125 if opened w/ a savings account.
    Anyways I was considering closing my old bank account, but would that be a bad idea or even applicable to my bank account.
    Thanks

  7. Question is – once they expire, do they automatically renew?

  8. Never say never! There are some times (not often, but it happens) that closing an account can help. For instance, if you have very little debt and a lot of credit cards with high limits, it would help if you closed the ones with no history on them (cards with no history don’t help your score anyway). A potential lender would be happier seeing that if you went out on a spree tomorrow, you could only get into $50k of debt instead of a $100k.

  9. Correct me if I’m wrong, but closing a recent credit card account that has a small limit (barely affects credit utilization) will sometimes help your score because the average age of your accounts will increase.

  10. I think the article is more for people who think they have to pay down all their debt and cancel their cards to improve their scores. Readers of this blog probably know better. However, I’m would bet there are some scenarios (as people posted above) where it doesn’t hurt and actually helps your score.

  11. Too many credit cards = no such thing

    Issuers only care about how many cards and how high your credit limit you have with them, NOT other issuers.

    If you are getting denied for having too many cards, don’t apply to crappy credit cards like CapitalOne.

    If you absolutely must get rid of some of your accounts, then consolidate your younger accounts into an older one.

  12. Is the the average age determined by using your *open* accounts or *all* accounts?

    That is a great question… that I don’t know the answer to, and have not read anything concrete either way. I tend to think that closed accounts stay on your credit report and thus still affect the score. I have never seen any article or FICO give any evidence that closing a very new account will help your score. Anyone have a dependable source for this?

    As the article says, the only time you should close account is if you you are specifically asked to by a lender and you really want that loan. Sure, I’d close a card to get a nicer mortgage rate.

  13. Some banks may perform a hard credit check upon opening an account, but unless you have a overdraft line-of-credit, it will not show up on your credit report.

    As for auto-renew, most companies do as they want to keep your business, but some do not. I’d give them a call prior to expiration if it really matters to you.

  14. jonathan, just out of curiousity, how many cc’s do you currently have? a range is fine if the question freaks you out.

    thanks.

  15. I’m more interested in combining newer cards to older ones from the same bank, though I now use neither of them…

  16. I have close to 20, as mentioned in the post.

    As for closing accounts, I have also converted/merged Citibank cards in the past, so that may also count as closing upon request. They only allow you to have 3 or 4 consumer cards at once, so after applying for a new one they’ll ask you if you want to close an old account, merge two into one, or convert an existing account. I always merge or convert to keep the highest credit limit.

  17. aah…duh. thanks!

  18. Re “Some banks may perform a hard credit check upon opening an account, but unless you have a overdraft line-of-credit, it will not show up on your credit report.”
    I called to open a CD at Countrywide Bank. They did a hard check on me and it shows up on my Equifax report. It was a CD, not even a checking account, definitely not a line of credit.

  19. I should rephrase that. I meant that it will not show on your credit report as an open credit line and therefore affect your average credit length, etc.

    All credit inquiries show up from the credit bureau report, regardless if they are done by Citibank, your landlord, or Mickey Mouse :)

  20. I am beginning to believe that an account’s age does not really matter. I say this because over the past 9 months I’ve been noticing some interesting facts on my credit score provided via http://www.myfico.com (also http://www.equifax.com). When I carry a balance on one of my newer cards which were opened 8 and 10 months ago just to prevent them from being dormant, no matter the size of the balance (e.g. last month was $5 and $6 respectively) my fico score tanks by like 20+ points (i.e. It drops from around 77X to 74X). The minute I pay off the balance and stop using those cards, my score immediate jumps back to the original amount!

    So, I have arrived at the conclusion that for some individuals, your fico score is computed based on your accounts with active balances for the most part. I regular use my accounts that are 7+ years old but the minute I mix that use with a new account my score drops. Isn’t that interesting?

  21. I still can’t bring myself to use Yodlee. I suppose I’m inherently paranoid, but a lot of what I do is network and data security. A service like Yodlee just really jumps out at me as a red flag, and a single point of entry for multiple accesses (and therefore even more of a security target). Am I the only one?

  22. KingSideRook says:

    Jonathan-

    Maybe you could devote a post to Yodlee? I went to their website a got a bit confused with their list of products. Thanks.

  23. I just received my amazon.com VISA (for the $30 discount). I paid off the balance and now I’m debt free all around. Should I cancel this card, or shred it and let it expire?

  24. I recently used the amazon.com Visa (for the $30 discount). I paid off the balance and now I am debt free all around. Should I cancel this card or simply shred it? There’s no balance on the card, and I have no other outstanding debt, but I want to make sure this won’t ding my credit rating.

  25. I have several cc’s but only 2 with a balance, I would like to close the unused ones to feel safer, should I? and also I applied for over draft protection with my bank of 16 years and they denied me because of to much open credit, why is that? What should I do? thanks

  26. OK- so supposedly once you’ve opened a credit card account, ‘the damge is done’. BUT that account will come off the reports in 10 years time (from the last reporting date). Hence in the long run it is still better to close unused accounts. Throughout your life you’ll apply for more and more credit cards continuously. If you keep all of them open you’ll just have more and more account, and more and more ‘damage’.

  27. Does anyone know if opening a new account will affect credit report versus simply applying for it. In other words, I’ve already applied for it and authorized a hard inquiry. Will accepting the offer at this point affect my credit adversly?

  28. dont get so many credit cards. that simple.

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