The amount of available credit a person uses in relation to how much credit they are eligible for is one part. Habits of prompt payment and maintaining a balance below the limit also factor in. In addition, the number and type of credit accounts play a part in a credit score. For those who are aware of these things or who are trying to monitor and improve their credit score it’s often wise to consolidate credit accounts and close those that you don’t use.
But what effect does closing unused accounts have on your credit score? Should you keep credit accounts open even if you’re never going to use them? Cancelling a credit card might actually have a negative effect on your credit history. One reason is that the average age of your accounts can decrease. If you have unused accounts that are several years old, those accounts add to the average age of your accounts. This is positive, because it shows your credit is more stable, and not composed of newly created credit accounts. In addition, credit utilization is affected if you close an unused account. Credit utilization is the ratio of the total credit card limits to the amount of your actual balances. If your balance goes above 30 percent of your total credit card spending limit, it negatively affects your credit utilization score. You can avoid spending up to the 30 percent mark of your total credit limit if you spend among all of your accounts instead of just one or two. That might be one good reason to keep an unused account open. Or, if you close an unused account, you might ask for a limit raise on another credit card to give you more room. That way, your credit utilization ratio does not change if you close one credit card account.
Another issue is your credit mix. Credit mix refers to a favorable mix of types of credit, such as a bank loan, credit cards and a mortgage. Credit agencies view it as positive to have a balance among these instead of just of one type of credit account. So when deciding what accounts to cancel know that retail cards are less beneficial to your credit score than bank credit cards, which are more selective in approving applications. That might mean you choose to close an unused retail account and your credit score is not as negatively affected as if you closed a bank credit card.
When deciding whether to close or to keep open credit accounts, simply remember to keep all of these factors in mind. There is a balance to strike: you don’t want too many credit cards, but you want enough accounts to show a long history of stable spending and a good credit mix. Often consumers find all they need is one or two credit cards, often to separate business and home expenses, and one card kept for emergency expenses. Having too many cards can definitely be a strike against you on your credit history. But, do consider the possible negative effects before you decide to close any credit accounts.