Closing old credit accounts may seem like a straightforward decision, but it’s one that can significantly impact your credit score and financial health. To ensure you make the right choice, it’s essential to understand the potential consequences and the best practices for managing old accounts. Here’s a comprehensive guide on what you should and shouldn’t do when considering closing an old credit account.
The Do’s of Closing Old Credit Accounts
1. Do Assess the Impact on Your Credit Utilization
Before closing an account, consider how it will affect your credit utilization ratio. This ratio is the amount of credit you’re using compared to your total available credit. Closing an account reduces your available credit and can increase your utilization rate, potentially lowering your credit score.
2. Do Check for Annual Fees or Unused Benefits
If the account comes with annual fees and you’re not using the card’s benefits, it may be a good idea to close it. However, weigh this decision against its impact on your credit history and utilization.
3. Do Keep Your Oldest Account Open
Your credit history length plays a crucial role in your credit score. Closing your oldest account could shorten your average account age, which can negatively affect your score. Always prioritize keeping accounts with a long history in good standing.
4. Do Pay Off the Balance First
Always ensure the account balance is paid in full before initiating a closure. Leaving a balance can result in interest charges and potential credit damage if payments are missed.
5. Do Notify the Lender in Writing
Once you’ve decided to close the account, inform the lender in writing. Request a confirmation letter that the account is closed with a $0 balance to avoid future disputes.
The Don’ts of Closing Old Credit Accounts
1. Don’t Close Multiple Accounts at Once
Closing several accounts in a short period can drastically impact your credit utilization ratio and average account age. If you need to close multiple accounts, space them out over time to minimize the impact on your score.
2. Don’t Close Accounts in Good Standing Without a Plan
Accounts in good standing contribute positively to your credit history. Closing them without a clear financial or credit strategy can harm your credit score unnecessarily.
3. Don’t Forget About Rewards Points
If the account is tied to a rewards program, make sure to redeem any unused points before closing it. Some rewards programs may forfeit your points once the account is closed.
4. Don’t Close Accounts During Major Financial Events
If you’re planning to apply for a mortgage, car loan, or any significant financing, avoid closing accounts. A sudden drop in your credit score during this time can lead to less favorable loan terms or even disqualification.
5. Don’t Ignore Potential Fees
Some lenders may charge fees for account closure or impose penalties for early termination. Review your cardholder agreement to understand any potential costs before proceeding.
Alternatives to Closing Old Accounts
If you’re hesitant to close an account due to its potential impact, consider these alternatives:
- Downgrade the Card: If the account has high fees, ask the lender about switching to a no-fee version of the card.
- Keep It Active: Use the card occasionally for small purchases and pay off the balance immediately to keep it in good standing.
- Set It Aside: If the card doesn’t have fees, leave it open and unused to maintain your credit history and utilization ratio.
Final Thoughts
Closing old credit accounts is not a decision to take lightly. While there are valid reasons for doing so, it’s important to weigh the pros and cons and follow best practices to minimize the impact on your credit score. By understanding the do’s and don’ts, you can make informed decisions that align with your financial goals.
If you need guidance on managing your credit accounts, JDP Credit Solutions is here to help. Contact us today for personalized advice on maintaining and improving your credit!