One of personal finance's perennial debates revolves around managing credit cards properly. A common dilemma many individuals face is whether to close an old, seldom-used credit card account or to keep it alive. After all, credit cards often represent one of the oldest lines of credit for many people, and this carries significant implications for their credit scores.
The Importance Of Credit History And Age
Your credit score is not just a number; it's a vital financial asset that can influence your ability to secure loans or even get the best interest rates on financial products. Two key factors that play a pivotal role in determining your credit score are the length of your credit history and the age of your credit accounts.
Older credit accounts, particularly those with a history of timely payments, positively impact your credit score. They demonstrate to lenders that you have a track record of responsible credit management. Similarly, the age of your credit accounts, including credit cards, contributes to your credit score. When you close an old credit card account, you risk shortening your credit history and reducing the average age of your accounts, which can potentially lower your credit score.
When Should You Consider Closing A Credit Card?
While deciding to keep or close a credit card can be complex, it's not always necessary to cling to every credit card you've ever owned. There are situations where closing a credit card account makes sense:
High Annual Fees: Some credit cards come with hefty annual fees and rewards that may no longer be relevant to your financial needs. In such cases, it might be prudent to close the account and avoid paying unnecessary fees.
Irrelevant Rewards: If the rewards and benefits of a credit card no longer align with your spending habits or lifestyle, consider closing it and exploring other options that better suit your needs.
Not An Older Account: If the credit card in question is relatively new and doesn't contribute significantly to the length or age of your credit history, closing it may have a limited impact on your credit score.
Says Shailendra Singh, MD & CEO of BOB Financial: ''It is best to maintain credit cards, even if not used, as credit lines with clean history help in maintaining a good credit score. If the number of cards is becoming unmanageable or some of them have fees that the cardholder does not want, the LIFO (Last In First Out) method should be followed, i.e., cards issued most recently should be closed first, as the vintage of sanctioned credit lines has a positive impact on credit score''
In essence, maintaining your older, well-managed credit cards can benefit your credit score. However, if you juggle too many cards or face steep annual fees for little return, consider closing the newest accounts first.
The decision to close or maintain a credit card account should be made carefully considering your financial situation and goals. It's important to strike a balance between preserving your credit history and managing your credit cards in a way that aligns with your financial well-being. By following expert advice and evaluating each card's relevance, you can make an informed decision that serves your best interests and helps you maintain a healthy credit score.
