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Money Mistake Monday – The Closing Credit Card Accounts Syndrome.

I will admit right off the bat that a lot of people with credit problems will disagree with me on this one, in that they think the best thing to do with a credit card account is to close it immediately when you are done paying it off. And while it can be a psychological boost to your financial state of mind, it could also be hurting your credit score. The reason I know this? I learned the hard way – back when I started paying off my credit card debt, I would close any account that I had finished paying on…even if it was an account that I had had for a very long time. And although my credit card debt was declining, so was my credit score – seems that they don’t like to see long term accounts closed, which was what I was doing. Closing the accounts I had for a long time while keeping open the more “recent” accounts (which I was doing) led to a pretty big drop in my overall credit score. I didn’t realize this was a problem until I started talking to people about why this was happening and then I immediately stopped closing accounts. The end result is that the credit cards that I do have (other than my newish American Express business card), I have had for a while now – some of them dating back to 1995. And although I don’t use them anymore and they sit in our safe, having them available to me and having the extra credit available looks good on my credit score.

The reason that this is important to mention is because I would not want anyone to hurt their credit score any more than they already have by being in debt. Getting out of debt (credit card, especially) is one of, if not THE most, important financial steps you can take to get your financial house in order. And working so hard to get rid of the debt and then having your credit score drop because of your closing of accounts is not a good feeling! Closing an account could mean that your debt to available credit ration could be way off, making your debt look even higher than it really might be. Also, by closing accounts you no longer use (especially older accounts), you can make your credit history look pretty short – not a good thing for keeping that score up.

I learned the hard way by just closing accounts when I was done with them – and it hurt my credit score. And although I do completely understand that closing an account does help you psychologically, you have to be careful which accounts you close and which ones you leave open. Closing the wrong ones can negatively impact your score, which is the exact opposite of what you are trying to do. So learn from me – don’t close credit accounts unless you have to but rather just stop using them, put them away in a safe place, bury them in the backyard. The exception would be any account that you will never use again and that charges an annual fee…I would consider closing them for sure!


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Comments (7)

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  1. Lily says:

    You’re right on about maintaining a credit history. However, simply cutting up cards, hiding them away, or burying them in the backyard can also hurt your credit score. This is because some credit card accounts become “inactive” if you make no transactions on them after a certain amount of time. Once an account is inactive, it no longer counts as much towards your credit score as active accounts, so you lose the benefits of the long history on those cards.

    To keep debt discipline while maintaining active accounts with long histories, you should consider putting one recurring bill (utilities, cable, telephone) on each credit card you no longer plan to use. You should check statements monthly to make sure no other charges were made (beware identity theft!) and to pay off the single bill on each card. Since you can set up bill pay online for almost any bill with almost any card, you should be able to put these recurring payments in place, then hide your cards so you can’t use them for anything else.

  2. david says:

    good tip lily, thanks!

  3. Aaron Stroud says:

    I think the key is to ‘know thyself.’

    Some people go into credit card debt because they’ve momentarily suspended their brain’s function. With the proper education and responsible money habits, they can safely keep their accounts open.

    However, some people are addicted to spending money. They might temporarily dig themselves out of debt only to repeat the cycle. Some people’s addictions to shopping are so severe that they’ll even re-open credit card accounts to feed their addiction.

  4. debtdieter says:

    It’s interesting, in Australia closing your old credit cards when you’ve paid them off has no impact on your credit rating at all! In fact it’s looked upon as a good thing having minimal open credit accounts.

  5. Paul says:

    A credit score is only a concern if you intend on borrowing more money. Paying off all debt and not acuiring more should be the goal; not seeing how much we can borrow.

  6. Tim says:

    unfortunately, Paul, the vast majority of people will need to get a loan of some sort for big ticket items like houses, cars, medical care, etc. Moreover, others will need a good credit score to avoid having to pay extra down payments, get a job that requires a credit check, not having to pay security deposits etc.

    cutting up credit cards, trying to forget about them if they are paid off is also dangerous, because you should actively maintain any financial accounts you have. this ensures that you aren’t getting charged errant charges, someone isn’t using your card, the creditor isn’t changing terms on the account without you knowing about it too late, etc.

    i agree that you should be maintaining your longest, on-time cards. If i had known that when I was in debt, I would have. however, i was naive about credit and credit scores. it has taken several years to repair and rebuild, which isn’t always that bad as it forces you to maintain good credit behavior.

    normally creditors will cancel inactive accounts that have been inactive for 6-12 months. BofA closed my wife’s account without notifying us because it was inactive for 12 months (8 of those months was a result of a fraudulent charge and waiting for the account to be cleared). considering it was a $20k limit, that would have been a major ding on her report as it was her longest held card and had a high limit. As it is not her primary credit card now (hate BofA now), we use it once a month to buy something cheap that we needed anyways. we have been doing this with our other cards. the worst part about the closing, was that BofA, even though within the 6 month grace period for reopening (you normally have 6-12 months to reopen a closed account, and generally this doesn’t include a hard credit pull, but sometimes it does), still required its underwriters to reassess the account and pull a credit report. i have to wait a quarter to check the credit report to see exactly what happened with the age of the account as well as if it was a hard credit pull.

  7. david says:

    Thanks for the comments/discussion guys!

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