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To close or not to close

How many credit cards do keep?

Question: I recently "moved my money" and I'd like to get rid of my old credit cards linked to the old bank accounts. All three were with Visa/Bank ofAmerica: a 25-year-old personal card, a much newer business account card, and a newer personal card with reward points. My brand new ones are Visas from a credit union, at better rates. Both are personal, but one is cordoned off to be used separately for business expenses.

I've been vaguely cautioned by employees at both places that it may be a good idea to keep one of the older cards to leave an older trail of good credit history, but they couldn't guarantee that their advice was actually true. The Visa company itself couldn't tell me for sure either, and the only advice I got from the endless automated phone loops at two credit history businesses was to buy their credit reports. 

Assuming there are no fees for keeping the old cards, should I save one and not use it, or occasionally use it in case it needs to remain active? Or can I simplify my life, cut loose the dormant accounts, and just move on to my new cards? Any advice appreciated. Charlie, San Francisco, CA

Answer: There’s a divide in the personal finance community over what to do in your circumstances. I'm strongly in the camp that recommends simplifying your finances and closing accounts you aren’t using. Here's the trade-off.

The reason for keeping unused accounts open is that it might affect the gap between your total balances and your total credit limit, as well as the comparable calculation for each card. The bigger the gap, the better it is for your credit score. So instead of closing the accounts, it might be far better to start using them a little regularly and then paying off the bill. You won't harm your finances this way if you aren't adding to your debt burden. (By the way, I'm using the terms "might" and "could" when discussing the credit score claculation since there are many moving pieces that go into the equation and I am simplifying here.)

A good resource for understanding the elements that go into the credit score calculation comes from Fair Isaac, the giant of the industry. Its FICO score is what most people mean when they say "credit score." Check out its online booklet, Understanding Your FICO Score. As the booklet makes clear, even after closing an account, the credit history on your credit report continues to play a role in determining your credit score. Good news if it's a good history. (If the credit history isn't so stellar, establishing a good loan repayment pattern going forward will improve your score with time.) 

The credit score is here to stay. That said, I'd rather break the tyranny of the credit score and not pay too close attention to the fine print and nuances of the credit scoring business. I understand why the credit card companies wouldn't want you to close the account. I don't think it makes sense to keep unused accounts open for long periods of time. You have the credit cards you need for your personal and business needs. You don’t need the others.

I like the way Liz Weston of MSN Money (and a regular on Marketplace Money) dealt with the issue in a recent article, 7 Nasty Credit Myths That Won't Die. Specifically, Myth No. 5:

Myth No. 5: "You should never close an account if you can help it."

Fact: The prevailing myth used to be that closing accounts could help your scores, which, we've learned, isn't true. But the knowledge that shutting accounts can hurt your scores has caused some people to balk at closing credit accounts, even when they probably should. 

If your issuer is charging you a fee you don't want to pay, for example, closing a card or two shouldn't be a crisis if you have good scores, other open accounts and no plans to apply for credit in the immediate future. If you do plan to apply for a mortgage, car loan or new credit card, though, you should hold off on closing any accounts until after you've been approved.

What really matters to your credit score over time is borrowing and paying the loan bill on time, while keeping the amount you borrow limited relative to your income. Preferably, you don't carry a balance at all on your credit cards. When it comes to credit cards, the best practice from a personal finance point of view that also reflects well on your credit score is to pay off the bill in full every month.

So long as you stick to that borrow-and-pay discipline, your credit score will be fine over time. It’s why I don’t see the wisdom in keeping accounts you no longer want open.

As Liz mentioned, there is an issue of timing. If there's a major credit-financed purchase in your near future, leave the unused accounts alone. Close them once the purchase is done. 

I vote for simplification.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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