Is it smarter to close a credit card or let it fall off?

Close or Keep: Navigating the Impact of Credit Card Closure on Your Credit

Managing credit cards is a crucial aspect of maintaining a healthy financial life. One question that arises often is whether it’s wiser to close a credit card or allow it to fall off your credit report. Each option has its own implications, which require careful consideration.

Understanding the Impact of Credit History

Your credit history plays a significant role in determining your creditworthiness and accessing favorable interest rates. A longer credit history generally signifies financial stability and maturity. Closing a credit card can negatively impact your credit history by shortening its length.

Available Credit and Credit Utilization

Your available credit, or the amount of credit you have available relative to your spending, is another important factor in calculating your credit score. Closing a credit card reduces your total available credit, which can lead to higher credit utilization. A high credit utilization ratio can negatively impact your credit score.

Impact of Closing a Credit Card

When you close a credit card, the following may occur:

• Shortened Credit History: Your credit history will be shortened by the number of months the card was open.
• Reduced Available Credit: Your total available credit will decrease, which can increase your credit utilization ratio if your spending remains the same.
• Potential Credit Score Impact: The closure could lower your credit score due to the aforementioned factors.

Impact of Card Falling Off

Credit card accounts typically remain on your credit report for seven years after they are closed. However, if you neglect to use a credit card, it may become inactive and eventually fall off your report. If this happens, the following occurs:

• Aged Credit Account Removal: The account will no longer contribute to your credit history, potentially reducing your credit score.
• No Impact on Available Credit: Your available credit will not be affected because the account is no longer active, so it won’t appear on your credit report.

Determining the Best Course of Action

The decision of whether to close a credit card or allow it to fall off depends on your individual financial situation and goals. Consider the following:

• Account Activity: If you regularly use the credit card and pay it off on time, it may be beneficial to keep it open to maintain a longer credit history and available credit.
• Credit Utilization: If you have high credit utilization and closing the card would significantly reduce it, it may make sense to keep the account open.
• Credit Score Impact: If you are concerned about your credit score, it’s generally advisable to keep older credit accounts open.

Conclusion

Both closing and allowing a credit card to fall off can impact your creditworthiness. It’s essential to carefully consider the potential consequences before making a decision. If you have doubts or concerns, it’s recommended to consult with a credit counselor or financial advisor for personalized advice.