How Opening and Closing Credit Card Accounts Affects Your Credit Score

I’ve been taking advantage of credit card bonuses and rewards for over 10 years now, earning thousands of dollars in perks while paying zero interest. I can honestly say that sign-up bonuses have never been larger than today. My rule used to be that I would only apply in exchange for at least $100, but now cards with $500 bonuses have been around for several months. I basically paid for all my holiday shopping with them!

A common reader question is – how does opening and closing all these cards affect your credit score? I’ve answered parts of this question here and here, but here’s the all-in-one answer.

Credit Score Basics

fico data turned into fico scores

Credit scores come from proprietary mathematical formulas, the most popular one being Fair Isaac (FICO). The input is the history and data from our credit reports. The output is a numerical prediction of our creditworthiness. Since we have 3 different credit reports (Experian, Equifax, Transunion), we have 3 different credit scores. They’ll never reveal all the ingredients to the secret sauce, otherwise they’d have nothing to sell us. Thus, we must make do with what we have. FICO has released this breakdown for us, along with many other collected details over time:

image altered from original in wikipedia: http://en.wikipedia.org/wiki/Credit_score

Effect of Opening New Credit Cards and/or Closing Existing Accounts

35% On-Time Payments. Not surprisingly, the biggest chunk of the score is your record of timely payments. If you pay your bills, you’re likely to… keep paying your bills! Briefly, anything 30-days late or worse can show up here, although a 60-day late or 90-day late is even worse. If you just barely miss a due date and pay it off within 30 days, it shouldn’t show up here. This factor has nothing to do with opening or closing credit cards.

30% Capacity Used. This refers to how much of your available credit you are using, also known as utilization ratio. The lower the better. Being maxed out on all your cards is obviously not a good sign. Utilization ratio is tracked both on an overall level and on a per card level. For example, having five different cards with a $1,000 balance each and $10,000 credit limit each (10% ratio x 5 cards) is better than having 4 cards with no balance and one card with the $5,000 balance (50% ratio on 1 card).

In the long run, having more credit cards would be a good thing as it should mean more available credit and a lower utilization ratio. For the same reason, you should never close a credit card unless not doing so would cost you money. You want to keep all the available credit you can.

15% Length of Credit History. The longer your credit history, the better. Both the age of your oldest account and the average age of all your accounts are tracked. Continuously opening new credit lines will thus hurt your credit score. At the same time, having a lot of old cards can “anchor” your average account age as well. If I already have 20 cards averaging 8 years old, adding another new credit card won’t make that average budge hardly at all. Recently, I learned that closing a credit card actually has no effect on your average age of accounts or credit history length. The closed account will stay on your credit report for 10 years.

If you have “young” credit history, you’ll need to balance the desire for new accounts (which will one day be old accounts) with how good your other factors currently are to keep a good credit score. Another strategy is to be added as an authorized user on someone else’s account with a long age. (They took this away for a while due to abuse, but brought it back. Just make sure it’s legit, for example with your spouse/partner or parents.)

10% Types of Credit Used. We’re getting to the lesser factors. How do I know? This factor refers to the mix of different credit accounts out there – revolving credit like credit cards, retail accounts (store cards), installment loans like auto loans, and home mortgages. Having a greater mix is better. However, I have never had a store card, auto loan, or a mortgage on my credit report, and my credit score has remained excellent. You definitely don’t need all of these types to have a good credit score.

Now, I do think it is a good idea to have at least some form of credit to show that you can handle the idea of borrowing something and paying it back. A credit card allows you to do this within the monthly grace period without paying any interest.

10% Past Credit Applications. This what everyone worries about, but it’s again we see it is only a 10% weighting. This factor makes sense though, as applying for a lot of credit in a short period of time is an indication of financial troubles. Therefore, you should be very careful with what are called “hard” credit inquiries. Hard credit inquiries (“pulls”) are usually from loan applications (asking for more credit). Soft credit inquiries occur when you are just checking your own credit score, or when other financial companies check your credit history as identity verification or for pre-approval offers (here, you didn’t ask for it).

Hard pulls affect your credit score negatively for a temporary period of time. For mortgage and auto loans, there are special accommodations by FICO for “rate-shopping”; All hard inquiries within a 14 day period for mortgages or auto loans will only count as one inquiry.

In regards to apply for new credit cards, it’s difficult to know the effect of a hard inquiry by itself, as a new credit card account will also affect the other factors above (average age of accounts, credit limits, utilization ratio). For someone with a longer credit history, a new credit card application will have little effect. For someone with zero credit cards, it will have a larger effect. The general consensus is that each hard pull knocks about 3-5 points off your credit score, and the effect decreases as time passes – after 6 months the effect is reduced, and after a year it is gone. The recording of inquiries does stay on your report for 2 years.

Takeaways

  1. For a high credit score, the most important things to do are to pay your bills on time and not use all of your available credit limit. Don’t lose sight of this.
  2. Applying for new credit cards will affect your score negatively for the short-term, with the effect going away over time and gone in a year. However, that doesn’t mean they aren’t precious. Only apply if it’s worth it through lowering your existing interest rates, upfront bonuses, cash back, or travel rewards. Hard pulls are the same as cash for me!
  3. Never close an existing credit card unless you are avoiding a fee or in exchange for something worthwhile (like a mortgage approval). Closing an account never helps your score, but only really hurts if it makes up a huge chunk of your existing credit limit.

Based on my own experiences, my personal choice is to limit myself to about 3-5 credit cards per rolling 6-month period (more when there are good offers and less when there isn’t). My primary concern is not really the credit score, but more the fact that individual issuers might not approve me just due to the inquiries even though my score is fine. I’ve scored over $2,000 in bonuses the last year alone, and that’s not even including my wife.

p.s. It’s not FICO, but now you can get your free credit scores with no trial periods from all 3 major credit bureaus. Tracking them regularly can alert you to significant changes in your reports.

Comments

  1. Good thoughts. I do think there are a few more reasons to close an account though.
    1. Some credit card companies will only allow you a certain amount of credit with them. I’m constantly closing chase accounts to open up the next one.
    2. There is something to be said for the simplicity. If you have an account open you are going to keep getting new cards and it’s one more thing to keep track of.
    3. Some cards you can reopen and get the bonus again. Thus the quicker you close the card down, the quicker you can reopen it to get more points.
    4. From my experience, most am. ex. cards have annual fees. I wouldn’t look to start there if I had weak history and wanted to build a high credit limit.

    • Catsissie says:

      Got a question: the second-oldest card I have open has been good, and until I got a new card (sadly, with what will be a high interest if needed), and it has the lowest interest of my three, with a cash-back reward, but it has an annual fee. That wasn’t a big problem, at first, since I was new to credit back then, and older. But I’ve had this card now for ten years, and if I got another from the same company, with cash-back as well, and no annual fee, would it make sense to close that card? Or would they possibly just stop the fee if I asked about it, after all these years? It’s not like it’s a fortune…$29.00, and the cash back makes up part of it. Your thoughts?

  2. So if you open accounts and never close them wont you that effect your credit too as you then have way too much outstanding credit out there? Very unfair that if you have a zero balance and want to close an account you get screwed

  3. On the subject of closing cards vs. leaving them open and not using them. Closing a card would potentially hurt your credit score a little bit (assuming that you leave the oldest card open) but wouldn’t closing it decrease the chance of fraud? (assuming I made multiple purchases to get a cash bonus, then there is the chance of that card number floating around somewhere). I really don’t want to have to monitor my accounts on a bunch of unused cards. Thoughts?

  4. #1 – so true.

    My experience? Getting a mortgage really boosted our young credit scores. We have never had any types of loans but a mortgage and credit cards that we have paid off every month.

    #3 – “Closing an account never helps your score.” I disagree with this. Not only do I never keep old accounts open, but sometimes it does boost my score when I close a credit card, and I am sure there are many instances where it would help.

    I find that length of credit history seems to have absolutely no impact on my score. (Refinanced a mortgage and closed my oldest credit card, a couple of years ago – my average open credit history is 1-2 years). The reality is this might keep my score from ever getting to 850, but it is regularly around 830. & I am talking REAL FICO. That said, since FICO is really a super secret formula, the truth is that my husband has a 20-year-old credit card and has always taken the length of open credit history more to heart. Our FICO scores both run the same (830-ish) though he has 20 more years of open credit history. Hmmmmm… Which is all the more reason I don’t give a flip about that part of the FICO score.

  5. P.S. To be clear, I have always closed an old credit card when I Replaced it, or when I was done with it (for one-time rewards). This seems to have absolutely no affect on an excellent FICO score. Now, if you have been hoarding credit cards, and decide 10 years later that maybe you should start to close some of them – I Can’t speak to that. There are many instances where closing cards will hurt your credit score – I agree. But, a steady open and close approach doesn’t seem to amount to a hill of beans, *if* you have a good FICO to begin with.

  6. It would seem to me that a good piece of advice, based on the rules outlined here, is to periodically request credit increases on cards that you’ve had a while, even if you don’t really need it. Or, does that generate a credit “hit” that isn’t worth the lower utilization ratio that you’d gain by increasing the denominator? In other words, you could reduce your utilization ratio by either applying for more cards or by increasing the limit on your existing cards. Is one generally better than the other, or does it just depend on the offer associated with the new card?

  7. I arrived in the US 2 years ago. I really love Mint to keep track of all my expenses. As a result, I tend to use my credit card as much as I can. I avoid debit card due to obvious security attached to it. Being new to the system with no credit score, I got my car on loan to get some credit standing. Got a secured credit card to develop credit history. Now the problem is, my credit is $2000 so I use up almost $1000 each month. As the calculations above, I am using more than I should be (but pay off in full every month), why this should really affect credit score. My feeling is, this whole system is broke and doesn’t give fair chance to everyone to get a fair score.
    Now even after 2 years, I am not too sure that I will get a regular credit card so avoiding new application to get a new drop in my score.

  8. Jonathan,
    I saw something the other day (can’t remember where now) that opening too many cards can have an effect on your insurance score and thus your insurance premiums. Or maybe it was amount of outstanding credit. Can’t remember. I know Credit Karma gives you an insurance score. Any more info on this aspect of credit cards and insurance scores?

  9. I had a credit card that I had been using for over 5 years (my first credit card). However, recently there were unauthorized charges and the Credit Card company closed my account and re-issued a new credit card. Will this have an adverse impact on my credit score?

  10. This is extremely helpful! I was wondering the same thing about my credit score with all the promotional offers I take advantage of. Thanks for putting this together.

    It seems ridiculous to me that closing an inactive credit card actually hurts your score. So much for being responsible!

  11. MAC, Insurance companies may check your credit and use that to determine your insurance rates. I’ve read that people with bad credit can pay considerably more for auto insurance. So theres a connection between your creddit rating and insurance costs. But I don’t think that something specific like opening a new credit card is something insurance companies will look at.

  12. Back in Aug this year I had a 779 from Experian. It actually indicated that the reason is it couldn’t be higher was something like my history shows I never had a loan, like auto loan or mortgage.

    • Catsissie says:

      The ones I get from the card companies tell me that, too…I “need” some other kinds of loan. I just got a third card in January with an 18-month zero interest to pay off some of my other stuff, which was pretty much a plan, and Bill Me Later, to replace my dying pc with a used but more reliable mac that I felt more at ease with. First eBay purchase…whew! I’m loathe to cancel cards now, though, since the only one I ever canceled was when they said it was a good idea, and I had paid it off…now I’d love to have it back! No annual fee, either…*sigh*…

  13. @David – Good points, I think we are in general agreement that it is okay to close an account in exchange for something else better. Another option is to just wait for an issuer to reject me, and then call them up for reconsideration and ask if closing an account would allow me to open up the card. Sometimes they will even let you move over the credit limit.

    @Stephen – The FICO scoring system shouldn’t penalize you for having too much available credit. It will penalize you if you USE all that available credit. However, individual lenders may get skittish because they might be afraid you’ll use it someday and have trouble repaying them instead of someone else.

    @Erik – In theory, yes it would reduce the chance of fraud and improve simplicity. If you have enough other card and credit limit, then you can close cards for that reason. But credit cards have good fraud protection (just report it and they refund you the money), I use a service like Mint.com or Yodlee to track idle cards.

    @Alexandria – Funny how we have different experiences. The score is definitely has a lot of complex interrelations. However, based on FICO information released, there is no visible reason closing a card should help your score. Closed accounts continue to stay on your report, and so your average age and such stay the same. This is of course assuming the closed account had no outstanding balance.

    @Adam – Some credit card issuers like Citi do allow you to request a credit line increase without checking your credit score. (soft pull) Just be careful when doing so and make sure. On the whole apply for a new credit card will probably lower your score initially, but if it increases your credit limits significantly it will raise your score in the long term.

  14. Seth Mason says:

    I’m curious what you do regarding closing cards in regards to the annual fee that many of the rewards cards have.

    Do you cancel the card before the annual fee kicks in? It seems like the fees eat into the bonus or you end up closing a lot of accounts.

  15. @Swati – I am not an expert on rebuilding credit, but have you tried applying for more credit? If you’ve had a secured card for a while, try getting an unsecured card. Debit cards are not necessarily less secure, it’s just up to the bank to replace the various features of credit cards. So if your score is really being hit, you can go back to debit cards.

    @MAC – Individual lenders or insurance companies can have whatever underwriting criteria they want, on top of the credit score. There are new flavors of credit scores out now for specific purposes (insurance, mortgage, life) with slightly different ratings of all these factors. I don’t really keep track of all that, but I doubt it’s all that different. The same things are important.

    @boo – Yes, if you take out a huge mortgage and pay thousands of dollars in interest, you can have a 785 score instead of 779!! :) Would that really be worth it? You score is fine without it. My score is fine without it. I have never been denied anything because I didn’t have a car loan or mortgage, and I have over 20 credit cards with over $100,000 in unsecured credit lines.

  16. @Seth Mason – For cards with annual fees, they usually waive it the first year so I consider that my trial period for the card to see if I like the perks. If I try out the card and don’t like it, then I will cancel it. I usually wait to the end of the year, and make sure I spent/redeemed all the points and got all the perks that I earned.

    Option 1: Cancel before you get the fee. Again, make sure your account is all ready to be closed immediately.

    Option 2: Wait until you get charged the fee, and cancel when you get that fee on your statement. They’ll refund you the annual fee. Even if you cancel later, the fee should be refunded on a pro-rated level.

  17. @ahbskauh – No, having a card replaced due to fraud should not affect your credit score. They should issue you a new number but the age and limit and all that should stay the same. That is, the original start date of the new card entry will be the same as your old card. Your old card number will stay on your report and be shown as stolen/closed due to outside fraud for a while, then will fall off your report. FICO will account for this.

  18. (1) I prefer not to take advantage of 0% APR or Balance Transfer, so I can be easier approved for credit, since bonuses worth more than any interest earned.
    Fact is if you carry a $5000 balance, even on a card with $25000 limit, that will make the lender nervous.

    (2) Since as Jonathan mentioned, there is no difference between a closed or an opened account when it comes to the effect on the credit length history, the only reason not to close an account is to keep the overall credit limit high versus the balance.

    If the balance is as close to 0 as possible, but not equal to 0 (since that signals inactivity), paying off it will still show a balance on the report, since an active card always has a balance (which incurs no interest during the grace period). Then there is not much to worry about the credit limit versus balance.

    (3) Lenders also look at other factors besides credit score, like income. Somebody with low income, but perfect credit score may difficulty to be approved IF:

    (a) The balance is too high, even if the limit is much higher.

    (b) Too much credit is extended, since it’s only sensible to not extend any more revolvable credit if somebody already has multiple times own’s income (especially household income), especially with that institution. Even if the candidate has a 850 FICO. So for those with lower incomes it’s even more important to close the credit cards they’ve squeezed bonuses from, as well as pay off everything even if there is a 0% APR promo.

  19. Jonathan, you’ve never had a mortgage? “I have never had a store card, auto loan, or a mortgage on my credit report, and my credit score has remained excellent. ”

    Because you discuss your mortgage in your home equity post that is right at the top? http://www.mymoneyblog.com/upd.....goals.html

    Or do you mean this mortgage was never on your credit report? I’m confused!

  20. Jonathan,

    I had Best buy card and Sears card which I did not use for long and finally it by closed by vendors. My questions is I open a chase credit card (just an example) for benefits and after 3-4 months, I don’t use it. Will it be closed by chase because of inactivity? Does it affect credit history if it closed by chase itself or I just call in and close my account.

    Can you briefly tell you experience about cards which you close or closed by bank because of inactivity?

  21. Alexandria says:

    @Erik – This is why I do close all my old cards.

    If I had to keep all these cards open and/or this was affecting my FICO in a negative way, then I wouldn’t bother. THEN it would not be worth these rewards. It’s not only fraud I am concerned about, but do you know how often these credit card companies change their terms?? I have so many better things to do than read all that fine print and get caught offgaurd by new annual fees. I’ve had some credit cards start to charge annual fees, over the years. & it’s easy to miss the fine print and just get surprised with a charge. I just close the cards I am not using, and skip all the hassle.

  22. Anita Graf says:

    You scored your wife as a credit card bonus too??? Wow, now that’s some deal! :-)

  23. Out of curiosity, how many credit cards do you have open now?

  24. @Sunny – The mortgage is only in my wife’s name. We live on one income (the lesser) and this simplified the loan qualification process.

    @YM – I have… around 10 open credit cards right now?

  25. I’ve been looking throughout the blog to see if you ever posted on how to continuously reap new benefit rewards, but I can’t find it anywhere. Unless there is a strategy for re-applying for a reward card you’ve previously held and canceled, it would seem that eventually, one will run out of new cards offering rewards, and then the game is over.

    Is there a way to open/close/open/close the same card over and over, each time re-earning the rewards?

  26. @Jon D – Many cards do allow you to “churn” i.e. cancel and reapply. But there are plenty of new cards each year as well. Finally, I can apply and then my wife can apply separately for the same bonus, and we have a small business as well for business cards.

  27. Jonathan – Opening 4 cards (merely to earn a bonus reward) per 6 months and leaving them all open adds up to a lot of cards over the years. Could you explain in a little more detail how you decide to close out cards that were opened merely for a bonus?

  28. sounds really petty to me

  29. Question. How bad will affect me closing an American Express card, I don’t use it since they don’t allow you to do partial payments on the card and also their annual fee are $125.00 and they already charged me for it, I just don’t need a credit card like that. Do you think that I should closed it and open another card to keep my credit in a good stand.

  30. @Eric. When you opened the card it had an affect on the average age of your cards. Closing it will not affect that measure. However, closing the card will affect your outstanding total credit line unless you move it to another card with Amex or open another card. If you have a large CL across all your cards after the closure and you never spend more than 30% of your credit limit on any given card that will remain open it is not going to affect your credit score by closing it. If your credit was good before you opened it it should be good after you close it.

  31. I had a credit card limit raised and it lower my score on my report .As this ever happened to anyone else?

  32. william says:

    If you’re over 60, be careful in contacting your existing c/c companies. I changed jobs and needed a card for traveling expenses. I called Bank of America and asked that they ‘split’ my available credit between my current card and and a second one. After a long wait on the phone, the rep told me that B of A would not give me a second card, AND my credit line was being reduced to the current balance on my existing card (effectively shutting down the card). The rep refused to tell me why, and would not let me talk to her supervisor.
    My banker told me that he seldom sees a credit score as high as mine, so the score wasn’t the problem. The only thing we can guess is that credit card companies think people over 60 are a bad risk (running up a bill, then passing away and leaving a balance for the c/c company). Yes, it’s illegal to to discriminate like that, but they can get away with it as long as they don’t tell you the reason.
    For now, I’m afraid to call any of my other c/c companies for fear they’ll do the same thing and I’ll be out of a job (not having a c/c to use on the road). I just try to keep expenses at a minimum and eat the interest.
    Remember, your c/c company is not your friend. If they shut your card down, you will still owe the balance. Be careful in contacting them about rates, more credit, etc.

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