How Long Should You Keep Credit Cards Open?

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Most Americans have a credit card — in 2014, 33% had one to two cards. While they are a convenience for some, if you are looking to improve your credit standings, you know that owning a credit card is an essential part of building credit. Along the way in your credit journey, you may have read credit articles that warn of the damage you can inflict on your credit score by closing an account. You might wonder — how long should I keep a credit card account open?

How Having a Credit Card Helps You

If you have good credit, you may have a credit card because of its rewards program or you like the ease of plastic over cash. If you have bad credit, or had bad credit in the past, you may have gotten a secured credit card in order to help build credit.

A credit card can increase your credit score in the following ways:

  • Adds a positive payment history to your credit report. Your payment history accounts for the largest factor (35%) in calculating your credit score. A credit card, provided that the issuer reports your payment history to the credit bureaus and you pay your bills on time, can give you this positive payment history you need in order to boost your credit score.
  • Low credit utilization can boost your score. The ratio of your credit limit to the balance you are carrying on your credit card is your credit utilization. This accounts for 30% of your credit score. If you have a utilization rate of 30% or lower, this will boost your score. Credit utilization is a two-factor aspect of your credit: the utilization of each individual card and the total of all your credit card balances to your combined credit limits.
  • Your Average Age of Accounts can increase your credit standings. Your age of accounts is 15% of your credit score. For the best score, having an average account age of more than 7.5 years will maximize this scoring factor.
  • The mere fact that you having a revolving account on your report helps. A credit card is a revolving line of credit. The other type of credit is an installment loan (like an auto loan or mortgage). Your mix of credit, or what kinds of credit accounts you have on your report, is 10% of your score. If you already have an installment loan on your credit – adding a credit card, which is a revolving loan, will help show diversity.

How bad is it to close an Account?

As we just showed, having a credit card helps you in numerous ways. However, sometimes a consumer will not be happy with the fees and/or terms of their credit card agreement and may just want to close an account. What you may have read is right — closing an account can hurt you. Here’s how:

  • Closing a credit account can increase your total utilization rate to skyrocket (and therefore sink your credit score). Having a high credit card utilization rate can knock off as much as 25 points off a good credit score (assumed to be 740 or higher).
  • The good news about closing an account: positive credit history stays on for 10 years from the date of closing. Therefore, your average age of accounts is not immediately affected. Your positive credit history is not touched. However, if accounts keep falling off of your report, your average age will drop.

American Consumers Usually Keep Their Credit Cards for a Long Time

According to a survey by creditcards.com in Feb 2016, about 25 million Americans haven’t switched out their main credit cards in 10 years. Another 20 million have never changed their main credit card. In contrast, marketwatch.com pointed out that Americans typically stay married for 8 years, stay in their jobs 4.6 years, and keep their new cars for about 6 years.

Senior citizens are the most loyal to credit cards: 33% have used their same cards for more than 10 years and 20 percent have never switched from their primary card. Young cardholders were the most likely group (43%) to switch credit cards.

Is it Beneficial to Switch Cards?

The terms of credit card programs are fluid — it’s perfectly legal for a bank to start charging fees or add interest or other terms that weren’t present when you signed up for the account. That once attractive card may lose its luster. In the creditcards.com survey, the most cited reasons to switch credit cards were to avoid fees, take advantage of rewards point bonuses, or get a card with a lower interest rate. 19 percent of those aged 30-49 and 18 percent of those aged 50-64 changed their frequently used cards in the past 4-5 years.

The competition for customers has grown fierce over the last few years. If you haven’t switched credit cards, you may be missing out on some very sweet deals. If you’ve gone through some life changes like getting married or retiring, cards that appeal to you may change from travel points to cash back on groceries.

If You Do Decide to Close An Account

  • Find the right department to contact. Don’t just cut your card up and send it back. For most cards, you can call the 800 number on the back of your credit card and talk to the right person at customer service.
  • Redeem any rewards points before pulling the trigger to close the account. When you close an account, you may lose them. If you have a cash-back rewards card, you may have minimums (like $20-$25) before you can cash out, so it may pay to wait to fully redeem all of your points. Some credit card programs only reward points every so often (even once per year), so you may want to wait until the next rewards cycle.
  • Pay down your balance in full. You can’t completely close an account until the balance is zero. If you want to close the card but can’t pay off the balance, have the card “frozen” to avoid incurring any new charges (however, interest will continue to be accrued). In addition, there are several great cards on the market that will allow a 0% rate on balance transfers.
  • Don’t assume that paying the balance on your last statement will pay it down to zero — interest rates or other fees may be applied after you notify the bank you are closing the card.

In Conclusion

Closing an account has almost no upsides: the older the account, the higher your credit score, an unused credit card with zero balance will only help to decrease your total utilization rates. There is also no “sweet spot “ when it comes to the number of credit cards you have — the Guinness World Records is a man who owns 1, 497 credit cards and has near perfect credit. If you want to switch up your credit cards, shop around for the best deal and open a new card. Warning: inactive credit cards are subject to closure. While the CARD Act ensured that changes to terms of the card must be given to a consumer 60 days before it is activated, no such laws apply to credit card account closure.

 

Related Articles:

Good (And Not-So-Good) Alternatives to Credit Cards

How Many Credit Cards Do You Need?

What Are Those Chips On My Credit Cards?

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