Reader Q&A: Should I Close My Old Credit Card Account That Has a Zero Balance?

Close credit accountToday’s reader question comes from our Debt Movement Facebook page.

If you have a credit, budgeting or debt question that needs answered, head over to the Facebook wall to post your question, or email us anytime at debtfree@debtmovement.com.

Reader Question:

I have an open, old credit card account. I don’t want to close it because it helps my credit score, but I have no balance on it. It has a $6,000 credit limit. Should I close it or at least lower the credit limit on it? I have another credit card I like better with a large balance $6,000 that I’m paying down this year. I’d like to keep that one to use and should I lower that limit too once I get it paid off.

Answer:

If you want to raise your credit score, know that you should never close an account, nor should you ask for the limit to be lowered. Here are a few credit repair tips that I can offer as explanation:

  • A big part of your score is the age of your accounts. Closing an old account can lower the average age of your accounts and, in turn, lower your credit score.
  • It sounds like you have only two credit cards. The credit-scoring formula will respond best to people with at least three and no more than five credit cards. Why at least three? They need enough information to judge you, and one or two credit cards simply is not enough information.

Ultimately, if you want the best interest rates, you should have a 720 credit score. I’ve rarely seen people with 720 credit scores who have fewer than three active credit cards on their credit reports. But I have seen my fair share of people with more than five credit cards who still have a 720 credit score (or higher).

The moral?

If you already have more than five credit cards, you best course of action is to pay off your extra cards and let them go inactive. Do not close them. Do not reduce the limit.

  • Your three-to-five credit cards should be kept active. If you do not use them, the credit-scoring bureaus will not know whether you can juggle multiple debt obligations, and they will assign you a low score. Better safe than sorry, they will think.

You can keep the cards active by setting up an auto-pay on a small monthly bill, like your gym membership or a magazine subscription. This way, you keep the card active while still maintaining the low balance.

  • Part of your score is based on your balance-to-limit ratio. The credit-scoring bureaus look at both your individual accounts and your collective debt as a percentage of your collective limit. This is called a “utilization rate,” and in both cases, the closer you are to a 30 percent utilization rate, the better.

Example:

Let’s say you have two credit cards. One of them has a $6,000 limit and a $6,000 balance. In other words, you are maxed out. On that credit card, your utilization rate would be 100 percent, which would not earn you any points with the credit-scoring bureaus.

Assume now that you have a second credit card. This one has a $6,000 limit and no balance. On that credit card, you have a 0 percent utilization rate, which is great for your credit score. And your overall utilization rate (assuming those are the only credit cards you carry) would be 50 percent, which isn’t great.

  • Since I don’t know the limit on your card with a $6,000 balance, it’s hard for me to tell whether that card is hurting or helping your credit score. If the limit is not at least $20,000, it is likely hurting your score.

You see, the credit-scoring bureaus will respond best to people with no more than a 30 percent utilization rate. So in your case, if the card with a $6,000 balance does not have a limit of at least $20,000, you have exceeded the 30 percent rule.

If this is the case, you should transfer $1,800 to the card with a $6,000 limit. This way, you maintain a low utilization rate on the card with a $6,000 limit, and you lower the utilization rate on the card with the $6,000 balance.

Keep in mind that my answers are always based on a credit-scoring perspective. You might have valid reasons for wanting to close your credit cards.

For instance, if you have a long-term habit of abusing credit, your finances will probably be much better off if you live a credit-free life while adjusting your spending behaviors. But from a credit-scoring perspective, you are better off keeping the card open.

 

About the Author:

Phil TironePhilip X. Tirone is the creator of The Free Credit Score Webinar and the 14-Day Credit Challenge, both of which teach consumers how to achieve a 720 credit score. You can visit his blog on how to raise your credit score at 720CreditScore.com.

  • http://twitter.com/jpcgauthier Jean-Paul Gauthier

    While I would agree with some of what you state Philip (closing out a card can work against you) let’s look at this from a different perspective – A “Credit Score” is in reality a “Debt Score” If you look at how it’s calculated, it’s all about how much DEBT you have and how well you manage that DEBT. If you have a few cards with no balances (you have no debt) your score is lowered – as you state in the article. If you have many cards with high balances (you don’t manage your debt well) your score is lowered. It is only when you have debt and you manage it well (IE the credit card companies keep you in bondage) that your score is high. Let’s be honest, the credit card companies are very good at this game and make billions each year – this is a game the average consumer loses every day. Let’s start promoting that living on credit – as my grandfather use to say – is dumb, period.

    IMHO – go debt free – save up and pay cash – yes for everything! It can be done.

  • http://www.MoneyPlanSOS.com/about Steve MoneyPlanSOS Stewart

    I can’t remain silent. This site is dedicated to eliminating debt, so why are we promoting the idea of keeping credit cards around?

    Worse yet, the author of this article is recommending that you have more than two credit cards and that you use up to 30% of the available balance.

    If the available balance between three credit cards is $30,000 that means Philip is coaching us to charge $10,000. I don’t know about you but I couldn’t pay that bill off every month!

    By the way, I haven’t had an open credit card account for more than four years but my credit score is 769. I even recorded a video when I checked it (search YouTube for “Cranky guy buys his FICO score”

    Yes, a good credit score can get you a better rate on a mortgage. There are other alternatives like eCredable To help me do that and not require debt products.

    I choose to spend my time building wealth, not a credit score.

    Now y’all go ahead and lambast me. I look forward to your comments.

    • http://www.facebook.com/joanotto Joan Concilio Otto

      I’m not lambasting, I’m thrilled! I very much agree. Our family’s decision to get rid of cards is based, actually, not on our own irresponsibility, but on our desire not to support an industry we feel is generally dishonest. We don’t want a mortgage, but IF we were to get one, we would not want it from a lender who believes a three-digit number decides our payment abilities.The biggest fallacy I hear is that there isn’t a way around needing a score – it’s just not true. (And all our cards are closed, yet we have scores in the 760s, higher than we ever did when they were open!

      I know there are plenty of decent people who truly believe that it’s in your best interest to keep SOME debt. I’m just not one of them and I don’t prefer to take my financial advice from them!

      • http://www.MoneyPlanSOS.com/about Steve MoneyPlanSOS Stewart

        Yay Joan! I won’t support the credit card industry either. My reasons are not due to their dishonesty (I’d have to stop watching Super Bowl commercials if that were the case) it’s more a matter of economics and my desire not to harm my fellow man:

        1) I tend to spend more when using plastic. It’s true to some extent with my debit cards so imagine what I would be like if I didn’t feel the pain of the purchase for 30 days!
        2) Soooo much money is zapped out of our economy in the form of late fees, over the limit fees, and credit card interest charges. I think there are better uses for our money.
        3) Things are more expensive for everyone because businesses have built the cost of charge card processing fees into the price.
        Everyone (my fellow man) pays for payment card charges even if they don’t use credit. This could change with the new surcharge policy changes, although I don’t think it will. Maybe retailers will offer discounts to cash, check and debit card purchases.

        I may be the only one that thinks this way but I believe credit cards are harming my neighborhood. I hope to be a testimony to others that want to improve their finances and the finances of their community.

  • http://www.currentfinances.com Don Current

    To me, this sounds like playing games with money. “You want to have 3 credit cards with 30% utilization for optimum scoring.”

    I choose not to play games with my money. That’s what Las Vegas is for. I’ve purchased numerous cars and other large purchases with just cash. I don’t NEED a good credit score because I choose not to play any shell games with my money just to please a bunch of bean counters who’s primary customer needed bailed out by the government.

    Think about that for a minute. The FICO system is not designed for the consumer. It was designed to help banks make good credit lending decisions. The same banks that had to be bailed out due to poor lending decisions. Do you really want to trust your financial future to that system?

    (K)eep (I)t (S)imple (S)tupid. Plan ahead. Pay cash. No money games required.

  • http://www.focusedintensitycoaching.com/ Scott Maderer

    Well not to pile on but I fully agree with Don, Steve, and Jean-Paul. Basically I refuse to play the credit score game but (like Steve) I still have a very high credit score (though that actually frustrates me I’m trying to get it to go away). I’ve also recently checked into things like getting a mortgage and insurance rates that are based on credit worthiness and my interest rate that I qualify for is actually the best available. In the case of the mortgage (which I did with a friend out of curiosity but they did the whole process) it did require manual work on his part. In the case of the insurance rates my score was better than my mother’s who does have the exact situation you describe here as the “ideal” situation.

    So basically, I disagree at both a philosophical level but also a practical one, I currently have a better situation with zero open credit cards or accounts.

    Scott

  • Steve Adkins

    I could not agree more with the previous comments. Get out of debt and quit playing with debt scores. I have not checked, but my debt score should be N/A since I have not used any form of debt since 2009.
    @AdkinsDebtDiet

  • Philip Tirone

    Question for you guys…

    If a friend of yours was going to buy a home, would you advise the person to get a loan if they did not have the money to buy it?

    Does the fact that currently, 30-Year Fixed rate mortgages are at 3.5%, and tax deductible…. does that make a difference?

    I believe this is an example when having debt is appropriate.

    That being said, in the last two paragraphs of my blog posts, “I only speak from a credit scoring perspective,” AND, if someone has a “long-term habit of abusing credit, your finances will probably be much better off if you live a credit-free life while adjusting your spending behaviors.”

    In my course, I explain that a person should never carry debt (and I’ve never said that it makes sense to carry a credit card debt of 30% of the balance when you can pay it off in full).

    That being said, I am a believer in playing the credit game in way that doesn’t cost a person any interest. This way, you can have the best of both worlds…. a high credit score, no debt, and no cost.

    Let’s keep the banter coming!

    Philip Tirone

    720CreditScore.com

  • http://www.MoneyPlanSOS.com/about Steve MoneyPlanSOS Stewart

    Philip, thanks for replying so respectfully. I’m extremely passionate about this subject and vehimately object to people being told that they must have a good credit score in order to pay off debt. I believe someone’s energy would be better spent focusing on eliminating debt than juggling credit card statements. It also bothers me when my brothers and sisters are led to believe that the only way to get a house is by having a great credit score (I haven’t heard you say this but it’s in the same camp).

    My desire to lead people away from the trappings of consumer debt would not allow me to stand by and watch. There are other alternatives and options to improving finances without credit cards – that is why I had to jump in and comment.

    Finally, to answer your question: I would advise (and have advised) my friends and clients to take out a 15 year fixed mortgage if it didn’t strain their cash flow and only after they have paid off all their consumer debt. While it isn’t widely accepted, I am educating Americans on the new alternatives to qualifying for a mortgage and ways to pay it off quickly.

    Have a productive day.

  • Hitem20

    To be fair to Philip X, its his business to keep people in debt. This tells you all that you need to know…”In summary, if you want to know how to raise your credit score by paying off debt, remember two things: keep your balance low and keep your debt active.”

  • http://www.facebook.com/jplynn Jarim Person Lynn

    The problem is many Americans lack patience and that lack has tied them to 65 hour workweeks they wish they could change in addition to years of unfulfilled passions they try everyday to ignore.

    I’m not saying that you can’t follow your passions or have a great work/life balance. I’m not saying you can’t save boatloads of money and have a high credit score. What I am saying is that most Americans won’t. Most people have to lose for a few to profit. Most people that I have counseled (both with financial problems and without/only looking for investment advice) even they have no credit card problems, they’re one step away from financial armageddon keeping a loaded financial weapon around them as such.

    One out of every two Americans does not pay their credit card balances off each month. 87% of the people in my community (African Americans) carry revolving balances. Credit card companies aren’t stupid. You will get caught sooner or later and even if you don’t you have to ask yourself is it worth it?

    The possibility of a relapse?

    The probability of a war with the credit card company over an unwarranted late fee? The wasted years of my life thinking I could outsmart a half a trillion dollar financial industry at their own game? The high possibility of finding myself in bankruptcy down the road?

    These are the basics of risk/reward. A very simple ratio/way of looking at things that can provide you more wealth that you can ever imagine.

    See, myself along with all of my”reward point” friends who were playing the credit card juggling act initially were missing the fundamental concept at play here which chronically kept us from being wealthy.

    The question has never been “what if I pay my credit cards off each month”.

    The question is “what if I DON’T?”

  • http://www.facebook.com/jplynn Jarim Person Lynn

    Hi Philip, as an advocate for debt free/cash based living, I coach people, including myself, to obtain every single thing they truly want in life, with cash.

    In response to your question, there are far too many avenues obtain a mortgage than using credit cards and credit scores. However there are also far too many ways to obtain a house than with debt in the first place.

    Just a few:

    -Rent until you inherit property

    -Tax delinquency sales

    -Buy it outright from investments made over a few years.

    Personally, I like to steer my clients towards buying their homes outright. On top of the mortgage people will pay, the documented reality of people getting in over their heads when they use other people’s money is a huge detour for me and mortgages. You are much smarter with your money when its YOUR money and not an amount some bank says you can comfortably take out. And after all, its not even “their” home if BofA owns it.

  • http://www.facebook.com/jplynn Jarim Person Lynn

    So as you can see, there are a variety of housing/budgeting situations you can find yourself in depending on WHAT house you’re looking at. And the key to making them work is to have the appropriate income needed to take out a mortgage for that type of house in the first place. The general rule for being able to comfortably take out a mortgage is to have no consumer debt and have an income of 1/3rd the overall price of the house/amount of the mortgage.

    But back to staying debt free.

    It takes 7-8years max to buy a $310k house in cash folks and we’ve been telling you this since 2009. Noone needs to throw away 22 years of compound interest you could invest allowing you to never have to work again simply because you had to rush into a 30 year mortgage payment.

    And this is even more likely to happen if you’re following our plan with your significant other and can maximize that very powerful “dual income” you both have.

    For anyone swearing that what I’m instructing you to do is impossible, you need to know that if you make the income it takes to qualify for a $310k mortgage then you and your spouse can save and invest the $2300/month necessary to do this. But if you don’t make the amount to qualify for that mortgage, then you should have never gotten this far in your purchase decision in the first place.

    Only buy things you can afford and you will be wealthier than just about everyone else around you.