What Happens When I Close a Credit Card?

Last Friday is affectionately known as Black Friday, and and today is Cyber Monday.  These colorful monikers are used to describe two of the heaviest shopping days of the year, both of which kick off the holiday shopping season.  This isn’t a secret and the retailers see you coming.

The National Retail Association will release the official results of Black Friday shopping on November 28^th, but we already know that the numbers are going to be massive, because they always are.  In fact, the billions that will be spent from Black Friday until the after Christmas sales will likely outpace what we’ve spent at retailers in the preceding 47 weeks.

So, why am I telling you all of this?  I’m telling you because many of you have, or will open, new retail store credit cards or general use credit cards during the holiday shopping season because their offers are very enticing this year.  Retail card issuers will offer between 10 and 20 percent off daily purchases, and some of the general-use card issuers are offering $100-$200 cash back bonuses if you charge more than $500 over the next three months.

Because you’re likely to spend more than normal, you’re more likely to consider at least one of these offers.  While many of you will permanently add the card to your wallet’s inventory, some of you will use the initial discount offer and then close the credit card after the holiday season.  For those of you who’ve followed my Mint blog, you know that closing a credit card can cause problems for your credit scores.  So, what gives?  Is it a good idea or not to close a credit card?

The Good News

The good news about closing credit cards is that you eliminate the potential for fraudulent use, which shouldn’t be much of a concern to you since the Fair Credit Billing Act caps your liability to only $50.  There’s also no way you can use that card to get yourself into excessive (or even modest) credit card debt, and that’s not a bad deal either.  Although, I’d argue that getting into credit card debt is a choice, not a requirement.

Generally, it’s ok to leave your credit cards open and use them all from time to time just to prevent the issuer from closing them because of inactivity.  Having unused credit limits is actually very good for your credit scores, even if you never use the card.  Of course, you only have unused credit limit if your cards are open.

The Bad News, and More Good News

The bad news when closing a card is made up of one big deal and one myth.  When you close a credit card you lose to access to the credit line, which can lower your credit scores.  The amount it can lower your scores is going to depend on how much of a line you just lost AND how much credit card debt you carry on other credit cards.  If you have no debt, then the closure might be meaningless.  If you carry a lot of debt, then the closure will likely be significant.

If you’ve ever explored the downside to closing a credit card on the Internet, then you’ve inevitably seen someone talk about how you should close newer cards and leave the older ones open.  This is the myth and it suggests that closing older cards can make your credit file look younger, which lowers your credit scores.  Credit scoring systems take the average age of your accounts when calculating your scores.

The problem, and what makes this one a myth, is that the average age of your credit accounts considers both open and closed accounts, including credit cards of all types.  According to Craig Watts, a FICO spokesperson, “When assessing length of credit history, the FICO score considers the origination date on all accounts on the credit report, open and closed.”

This is great news for consumers who want to close down unused or unwanted credit card accounts.  Now they can choose which ones to close based on how expensive the rate is or how high the annual fee, and not based on whether it’ll hurt the average age of your credit report.

I’d strongly suggest when you’re choosing which cards to close that you consider closing retail store cards instead of general-use cards like Visas, MasterCards and Discovers.  The reason is the limits on retail cards are generally very low, at least when they’re initially issued, compared to the limits on your general use cards.  This will limit the damage you’re going to cause to your credit scores because you’re probably not closing credit cards with thousands of dollars of credit limits.

Happy shopping!

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow John on Twitter.