Let’s say that you have an old credit card lying around and you don’t plan on using it anytime soon. That’s ok, a lot of us have been through this situation. But if you’re tempted to cancel it, we have some bad news: it may have some consequences, especially when it comes to your credit score.
Long story short, reconsider your options. Here’s how closing it can affect your credit:
Your credit utilization gets lowered
When your credit score is calculated, 30% of it consists of your credit utilization ratio. Or how much of your total credit you are using. Canceling your card will lower your credit limit and can increase the 30% credit utilization, thus hurting your credit score.
Your accounts’ average age gets decreased
15% of your credit score is also based on the total length of your credit history – the amount of time you’ve been actively relying on credit. If you decide to close an old credit card, you will automatically reduce the average age of your accounts, which has an impact on your credit score.
Your credit mix is impacted
Finally, 10% of your credit score is related to the concept known as credit mix. While this is considered by many less of a concern, especially if you have other cards. However, it could have a bigger than expected impact if you’re closing the only credit card you have in your portfolio.
On the other hand, there are a few solid arguments in favor of canceling an old credit card that you don’t use anymore, starting with avoiding the annual fee, already having other lines of credit able to boost your credit score, as well as extricating yourself from sharing the card with somebody.
To wrap it up, before closing your credit card, think about downgrading, if the annual fee is what matters the most. Just make sure that the card’s existing history will be transferred over the new card!