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Q&A: Closing credit accounts doesn’t need to be a big deal

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Dear Liz: Your recent response to the person giving bad advice about closing credit accounts was truly a public service. Over the years, I have opened and closed many credit accounts. Only once was a credit card closed for non-usage by the issuer and there was no major degradation of my credit score. Never has one of my actions altered my score by more than a few points or for more than a few months at a time. Misinformed statements such as those made by that individual can confuse people who are new to the world of credit or unfamiliar with how it works.

Answer: Before the advent of credit scoring, your ability to get a new loan or credit card may have been affected by a notation on your credit reports that a previous account was closed by the issuer. Today, though, it doesn’t matter who closes an account and there’s no need to add a notation that you were the one requesting the closure. If you mishandled the account, that will be evident from the missed payments that would show up on your credit reports (and be incorporated into your scores). If you handled the account responsibly, that will also be evident on your reports.

As mentioned in previous columns, closing credit accounts can have a significant impact on your scores if you have a few accounts or major blemishes on your credit. Closing a card with a high limit can ding your scores more than closing one with a lower limit.

But people with multiple credit accounts and a history of managing credit responsibly aren’t likely to suffer significant or lasting damage to their scores when they close an account.

Q&A: Don’t be overly fearful about closing credit cards

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Dear Liz: You recently advised a couple who have excellent credit, no outstanding loans and a low credit utilization rate that they could close their credit card with a company that keeps reducing their credit limit when they don’t spend enough on their card. The writer has to contact the credit card company every time to get it restored to its original credit card limit. You suggested they could close their account but you didn’t address their question about whether they’d be better off settling for a reduced credit limit. Wouldn’t a reduced credit limit harm one’s credit scores less than closing an account?

Answer: Probably, but the point was that closing the account was unlikely to do significant or lasting harm as long as they had other credit cards. The couple could make the effort to try to keep the account open, but the hassle might not be worth the limited benefit to their credit scores.

People with excellent credit are often overly fearful about closing credit cards. It’s true that you generally should avoid closing accounts if your scores aren’t great or if you’re in the market for a major loan, such as a mortgage. It’s also a good idea to keep a big gap between the amount of credit you use (your balance) and the amount you have (your credit limit). That could mean hanging on to your highest-limit cards or having the credit limit of a card you’re closing transferred to another card you’re keeping.

But you shouldn’t be afraid of closing accounts if you have a good reason to do so.

Q&A: Simplify your finances with fewer credit cards

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Dear Liz: I have too many credit cards that I opened to get frequent flier points. I understand that closing a credit card lowers your credit scores. How long does the ding last? How long should I wait before closing another card? Do you have any other advice on this subject? You probably have discussed this in previous columns but it might be worth repeating.

Answer: If you have a lot of cards, closing a few is unlikely to significantly hurt your credit scores as long as you do so strategically.

A big chunk of your credit scores is determined by how much of your available credit you’re using. You want a large gap between the amounts you charge and your credit limits. Try to keep open the cards with the highest credit limits. If you have multiple cards with the same issuer, ask if the credit limit from a card you’re closing can be transferred to one you’re keeping.

Even if your scores do dip because of a closure, the effect is likely to be short-lived if you continue using credit responsibly.

Ideally, you would review your portfolio of credit cards every year or so to determine which cards to keep and which to close. Travel rewards cards typically have annual fees, sometimes significant ones, so you’ll want to make sure every card you have is at least paying for itself in annual rewards and benefits.

Also consider the mental load involved. As you age, you may find it more difficult to monitor multiple accounts and keep track of all the details. You may want to simplify your finances by winnowing your cards down to just one or two. At that point, keeping your finances manageable will be more important than maintaining the highest possible credit scores.

Q&A: Should I borrow to boost my credit scores?

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Dear Liz: I’m one of the beneficiaries named in my late relative’s will, and plan to use the money to buy a new car. Should I pay cash up front and avoid the interest charges on a loan, or set up monthly payments to help enhance my credit score (currently just under 800)?

Answer: A car loan might boost your scores, especially if you don’t already have an installment loan such as a mortgage on your credit reports. But once your credit scores are in the high 700s, you’re typically getting the best rates and terms from lenders. You’d be paying interest for no reason other than bragging rights.

Q&A: What to do with a drawer full of unused credit cards?

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Dear Liz: At 75 and 79, my husband and I have no plans to buy a new car or property. We own our home and cars. We have excellent credit ratings. We use one major credit card. I’m consolidating our financial life for our heirs. We have a drawer full of cards we never use. Is there any reason not to just cancel these cards and save our heirs the trouble? Should I care if my 850 credit score tanks?

Answer: At this point, simplifying your finances probably makes more sense than trying to keep your credit scores as high as they can possibly be.

Cards you aren’t using still need to be monitored for fraud, which is a hassle, plus you may be paying unnecessary annual fees. Reducing the number of accounts should make your life easier, but don’t go too far.

As explained in previous columns, each spouse should have at least one card on which they are the primary account holder. A spouse who is an authorized user often loses access to the card when the primary account holder dies and card issuers close the account. Few credit card issuers offer joint accounts these days, so you should determine who is the primary account holder and who is the authorized user on each of your cards before deciding which to close.

You can reduce the damage to your scores by trying to preserve as much of your current credit limits as possible. Ideally, the cards you keep will be the ones with the highest limits. If you’re closing other accounts at your chosen issuer, you can ask that the credit limits for the shuttered cards be transferred to the card you’re keeping.

Q&A: Is one credit card better than two?

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Dear Liz: I have a long-standing credit card with a national bank. As I travel a lot, I just opened a travel rewards card with the same issuer. I would prefer to keep the new card and close the old one, rather than keep two cards active with the same issuer. I understand from reading your columns this might (temporarily?) lower my credit score. Any other downside?

Answer: It’s hard to predict how an account closure will affect credit scores or how long the impact will last. The effect is likely to be greatest for people with few credit accounts and short credit histories. You may be able to mitigate some of the damage by asking that the credit limit from the old card be transferred to the new one.

Before you do that, however, consider why you’re averse to having two cards with the same issuer. The old card may have benefits the new one lacks, and could be a helpful backup if your new card is lost or compromised. The case for keeping the old card is strengthened if the annual fee is low or nonexistent. Just remember to use the old card occasionally to minimize the chances the issuer will close it for you.