Is it Wrong to Close a Credit Card Account?

Dear Credit Card Adviser, I have several credit cards for independent stores I opened because of special discounts they offered. I charged purchases, paid the cards and now they are at zero debt, but I have not closed them. My question is: Does it hurt my credit score to have unused cards? Will it hurt my credit score to close the card accounts not being used?

- Judy

Dear Judy,

Your dilemma will sound familiar to many people. As millions of Americans do their holiday shopping, some will no doubt sign up for store credit cards to get upfront discounts on their purchases.

Getting store cards for temporary spending actually has a lasting effect on your credit record.

Once the accounts are on your credit report, they don't go away easily. They can remain on your credit report for up to 10 years after they're closed.

Then, there are the initial downsides.

Unlike mortgage, auto or student loan applications, each time you apply for a new credit card, a "hard inquiry" -- the kind of credit check that can trigger a dip in your credit score -- will show up on your credit report. It will stay on your report for two years and factor into your score for the first year.

The addition of new credit card debt also increases your credit utilization, or debt-to-credit limit ratio, on revolving accounts such as credit cards. For FICO scores, this ratio is part of a factor worth 30% of your score.

You've paid off your store card debt, which should help to lower your utilization. According to Barry Paperno, consumer affairs manager for FICO, "in addition to making payments on time each month, the No. 1 concern for people with several new store cards should be ensuring that the amounts owed on these cards are as low as possible."

He says the best-case scenario is for store cardholders to pay off their balances quickly to reduce their utilization, which is figured for each card and across all of their cards.

What should you do then with paid-off store cards you don't need?

According to Paperno, they shouldn't be shuttered, since "open cards in good standing with low utilization turn out to be helpful to your score as they age."

Choosing to close those accounts might or might not result in a significantly lower credit score the next time it's calculated. It depends on the size of the credit limits you're losing and how much debt you have on other revolving accounts. Not to mention what else is in your credit report at the time of the credit check.

According to previous interviews with FICO representatives, when you close a credit card account that doesn't have a balance, the FICO scoring formula will start ignoring that account when it comes to utilization. You effectively lose the benefit of having an unused credit limit.

That said, store cards typically have low credit limits, so the loss may have minimal impact if you have other, higher-limit credit cards.

Where you can hurt your score is if you have other credit cards with high balances when you close some credit card accounts. The increase in utilization could have a negative impact on your score.

Closure doesn't automatically wipe out the payment history for that account. As long as the account remains on your credit report, it will still count toward your payment history, your types of credit used and the length of your credit history. Closed credit card accounts with no delinquencies or balances will come off your credit report within 10 years from the date they were reported closed.

Long story short: While you may not hurt your credit score too much if you close the accounts, your score won't benefit, either. In fact, you can improve your score over time by leaving the store card accounts open, paying them on time and keeping balances on them low.

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