Good credit ages like fine wine. The older, the better. But sometimes, your tastes change. And opening or closing credit accounts can impact your credit score.
Tell me whyyy...
Credit bureaus (think: Experian, TransUnion, and Equifax) help banks and credit card companies figure out if they can trust you to pay them back. To do that, they look at info like how long you’ve been building credit, what types of credit you have, and how many accounts you’ve opened recently. So, yeah, they’ll notice if you call it quits with AmEx or start something on the side with Chase.
What happens if I close a credit card?
Maybe the annual fee or interest rate is too much. You might just be sick of a card you don’t use hanging out in your wallet. Whatever your reasons, pulling the plug could...
Change up your ratio. As in credit utilization ratio – or how much you owe compared to your credit limit. A good goal is to keep it under 30%. But since closing a card lowers your total available credit, this move could spike the percentage of credit you’re using. Cool cool.
Mess with your average. Closing a card you’ve had for a long time could shorten the average age of your credit accounts. And hurt your score.
Since your score could take an initial hit, you might want to hold off on closing an account right before you apply for a new mortgage, auto loan or credit card. As long as you’re not shutting down your oldest account, your only card or something you still owe money on, your score should rebound quickly – if you keep making payments on time.
Okay. What about if I apply for a new one?
You can expect a “hard inquiry” to show up on your credit report. Because hard inquiries signal that you might incur more debt soon, it could temporarily lower your score. Too many hard inquiries can also hint at desperation. Not exactly music to lenders’ ears.
One caveat: credit bureaus will probably cut you some slack when you’re shopping for loans. Groups of mortgage or car loan applications are usually considered a single hard inquiry.
Opening a new card could also lower the average age of your accounts. The shorter your history with credit, the bigger impact this will have. But in the long run, using credit responsibly matters most.
Like your style, your credit situation might evolve over time. Don’t stress about adding a new card to your wallet or canceling an old one every once in a while. Just think twice before closing or opening a bunch at once.