Just a couple days ago I was having a conversation with some coworkers about credit cards. We were talking about if it’s wise to close credit cards that aren’t being used. I had heard from many sources one answer but I didn’t have an adequate reason why. Because of that, I had to hit the net and find out the reasons.
To think about it on the surface, wouldn’t it make sense that closing a credit card would remove debt load from your credit report? Wouldn’t that result in a better score? The answer is no and here’s why.
The computer I’m typing this article on has 4 Gigabytes of memory. At any given moment about 1 Gigabyte is utilized or about 25% of the total. That means that if anything goes wrong, I still have 75% in waiting. Let’s say that one of the memory chips went wrong and I only had 3 gigabytes left. Now I’m utilizing 33% of my total at any given time so my total utilization has one up substantially although the actual use has not.
Now, back to credit scores. Let’s say that you have 6 credit cards with lines of credit totally $50,000. You only use two cards and have a total of $5,000 sitting on the cards or 10% of your total. You then cancel 3 of the cards and decrease your available credit to $20,000. That means that your credit is now 25% used rather than 10%. When your credit utilization goes up, your credit score goes down.
Also, you get positive points for the age of your credit. Trust takes time to build, right? Canceling those older cards often decreases the age of your credit as well.
So keep your cards open and consider charging something small to each of them every 6 months and pay it off when it comes due.