The average American consumer had 3.45 open credit card accounts as of 2011, according to the Experian credit bureau. Not all of those cards are being actively used, but closing accounts negatively affects your credit score even if you do not carry a balance. Consider this bad impact before you close any credit cards.
Credit and Debt Balance:
Credit cards are revolving accounts, meaning they let you tap into pre-set credit lines. Credit scoring formulas weigh your total available credit limits against what you actually owe. You should use no more than 30 percent of your available credit, although 10 percent usage is ideal, according to MSN Money writer Liz Pulliam Weston. Closing credit charge hurts this balance by making your debt look worse. For example, if you have two credit cards with $5,000 limits and owe $2,000 on one of them, you are using 20 percent of your available credit. That immediately jumps to 40 percent if you close one of the accounts.
Credit Use History:
Lenders look for stability, and credit scoring formulas favor longer-term credit use, so you hurt yourself by canceling credit cards you have owned for a long time. Your length of credit usage is 15 percent of your total score, the MyFICO scoring site advises. Closed accounts stay on your credit reports for up to 10 years, but they lose their most of their positive influence when activity stops.
Considerations:
Help your credit score by keeping your credit card accounts open and managing them responsibly. Set aside cards you do not need, so you are not tempted to overspend. Get them out twice a year, and use them for inexpensive purchases. Pay the bills in full so you do not incur any interest. This infrequent, but regular, activity maintains your debt to available credit ratio and preserves a positive history on older accounts. You cannot be penalized with fees for not using cards, according to the Board of Governors of the Federal Reserve Systems, but banks can close down inactive accounts.
Warning:
Credit cards with bad histories stay on your credit reports for a long time, even if you close them. Most negative information, including delinquent payments and defaults, shows up for seven years whether the account is open or closed, according to the Federal Trade Commission. Do not close credit cards with checkered payment histories, hoping to get them off your reports, because you only damage your credit score by shifting your debt-to-available credit ratio.