Should I Have Closed My Credit Cards?

I did some spring cleaning the other day and found two credit cards in my drawer which I totally forgot I had!  One was a Home Depot credit card I got three years ago at the check out counter because I could save 15% off my $3,000 purchase immediately.  The other card was a Banana Republic card that I applied for also three years ago to save 10% off my $1,300 purchase of a couple new suits, shirts, and shoes.  Both cards have zero balances, and neither have been used since the initial purchases!

My first reaction was to close both cards since I didn’t want someone risking get a hold of them and going crazy buying Brazilian rosewood floors at Home Depot or alligator shoes at Banana Republic or something.  In essence, I wanted peace of mind and so, I closed both cards.  To my surprise, I didn’t get a hard sell to leave them open.  I pressed several buttons on my cell phone and both cards are now shutdown.  Ahhh, so nice to not have to worry and have less potential holes to leak wealth.

SHOULD I HAVE CLOSED THEM THOUGH?

It was only after I closed both cards did I begin to wonder what effect it would have on my credit score and other negative repercussions.  You may have some of these same thoughts too so here are some some tips before you close them:

1) If the card is your only credit card, you probably don’t want to cancel it. To build a good credit score, you need to prove you can handle credit!  Hence, even if you never use your credit card and hate credit, you should have one credit card open and never close it.

2) If the card has a long credit history, think twice before closing it. Your credit score is also based on your credit history i.e. a 20 year history of paying off your account is worth more than a 2 year history.  If the card is your oldest card, keep it.

3) If the card has a large credit line compared to your overall credit, think thrice about closing it.  If your overall access to credit is $15,000 between 3 cards, and one card has $10,000 of credit, you should probably think about closing the other two cards before your main credit line card.

4) If your card’s rate is lower than the rest, keep it. The two credit cards I closed probably had a rate of 20%+ because they are merchant credit cards.  Nobody should be stupid enough to use those cards and NOT pay them off in the first billing cycle.

5) If your card is tied to multiple payment accounts, you may want to reconsider. Imagine if a card is tied to your Amazon account, fitness club account, car insurance account, and home alarm bill.  What a pain in the butt to close and re-fill out all the forms.

IMPORTANT: If you have addictive tendencies such as gambling, smoking, over eating, cheating and so forth, you probably don’t want to have more than one credit card, or even one credit card, period.  It’s important to know thyself and figure out whether you can handle paying for things on credit and paying off the balance every month.  Work on kicking your addictive habits first, before using a credit card.

OPENING UP STORE CREDIT CARDS TO SAVE MONEY

If I spend more than $1,500 and there is a 10% savings at checkout I probably will spend 5 minutes to fill out a form for a store credit card.  Call me a sucker for saving money, but that’s what I like to do on things I plan on purchasing anyway.  I don’t go shopping much at all, but when I do, I’m willing to do a lot to reduce my bill.  Furthermore, I always pay off the bill in the first billing cycle, or before the 0% interest rate ends.  To do otherwise is just illogical.

I have worried about how opening up new lines of credit affects my credit score, but I’ve stopped worrying.  First of all, the credit lines are so small compared to my overall credit that it doesn’t make a difference.  I always pay off the bill in full, so it doesn’t negatively affect my score.  And finally, there’s no point in overly worrying about your credit score if you consistently pay your bills on time.

FAVORITE CREDIT CARDS

Barclaycard® Ring MasterCard® – 1% Back on Balance Transfers – This great card has the lowest APR I’ve seen in the market today at 8% compared to the average credit card interest rate is 15%. You get 1% back on all balance transfers made in the first 60 days of opening an account and there is no annual fee or balance transfer fee. There’s a fantastic social community of Ring MasterCard holders once you join to interact with and save money.

The Hawaiian Airlines® World Elite MasterCard® – Hawaiian Airlines is hands down the best airlines in America. Their service is impeccable, they provide food, snacks, and drinks included in your air fare, and each seat comes with a USB charger. This Hawaiian Airlines card gives 35,000 bonus miles if you spend $1,000 within the first 90 days, gives you one complimentary bag to check-in, and a one-time 50% off discount off your companion’s air fare! Round-trip ticket prices range from $450 – $1,200, so that’s a $225 – $600 savings right there to paradise! You also get $100 off a companion tick for roundtrip coach travel between Hawaii and North America each year, 1 point for every $1 spent, and 5,000 annual bonus miles after $10,000 in annual spend. The annual fee is only $89. Oahu is my home state and it is the most beautiful place to vacation!

Check Your Credit Score: Take a moment to check your free TransUnion credit score through GoFreeCredit.com, a company I trust. 30% of credit reports have errors, which could put a serious hamper on your refinancing or new loan borrowing abilities. I had a $8 late payment I didn’t even know I owed crush my score by 100 points come up during my last refinance. The average credit score for rejected mortgage borrowers has risen to 729 due to more stringent lending requirements. Do you know what your score is?

 

Updated 12/1/2014

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. Money Beagle says

    I’ve found that most store cards will close after a certain amount of time after inactivity anyways. They used to seemingly keep them over forever, but I’ve seen them now with a little as a year before they decide to cut you off. I always keep an eye on this not only through the physical cards, but by checking my credit report for free every four months.

  2. says

    We have one active credit card and probably need to get at least another active card. There is an airline card, but I don’t even know if it’s still valid and I need to check on that. The Mrs. has a Macy card. We probably have another one or two forgotten accounts that we haven’t used. Don’t they get closed up if they are inactive for a few years? The last time I did a credit check it said we only have one card. My score is around 720 or something like that. I should work on getting it higher.

  3. says

    Good to know that closing these won’t really affect your credit score. My husband and I both opened a handful of merchant cards in our early twenties. We have since moved cross country and possibly didn’t change the billing addresses on those cards. Every once in a while I’ll panic and think, did I ever close that Target card? So, no more merchant cards for us, even if we save money. Too much to think about.

  4. paoyu says

    The wife and I have a bunch of credit cards in the teens, our credit score ranges from high 700s to low 800s depending on the credit bureau. No need to worry as long as bills are paid on time.

    We have Best Buy, Sears, Home Depot, Lowes, HHGregg, Macy’s cards just collecting dust on our desk drawer. This is the reason, we got them for the sake of getting their 0% interest for 18-24 months, everytime we need to replace an end-of-life major home appliance.

    We could pay all our appliances in full, but why do it? Instead of losing $3000 upfront for buying a refrigerator and stove, we dump that $3000 in some mutual fund instead, and let the money grow. If the offer is 0% for 24-months, then 3000/24, which equates to $125/month and the bill is paid for by the time the rate ends.

    Reason we keep them active, who knows when another of our appliance will die, at least we could take advantage of their 0% interest again. We only use like 3 cards actively, one is Costco AMEX for cashback, some other cashback for gas, and an airline credit card. We used to travel alot, but due to job change, haven’t been doing so, but logged lots of miles on that specific airline. The purpose of that credit card is to keep the miles alive.

    Credit card if used wisely and paid in full on time, can be to anybody’s advantage. Make the credit card work for you, not the other way around :)

    • says

      Why not close em, and then reapply at the checkout counter to get that 10-15% off again?

      0% interest isn’t exactly worthwhile b/c savings rates are under 1%. So the opportunity cost isn’t huge.

      0% is only good if you can’t afford it in the first place, which it sounds like you can.

      • paoyu says

        Well . . . . most stores will allow you to get 0% for items when you use their
        card again for in-store purchases, assuming the old items have been paid off,
        so really no point in re-applying. Cancelling and re-applying dings credit
        scores, although not that much, plus who knows when I’ll be needing my
        score for re-financing a mortgage for example.

  5. says

    I would consider closing the Home Depot/Lowe’s type credit cards so that I could reopen them later and get another discount.

    I have 2 credit cards that I use religiously, Amex Blue Cash (gets me about 1200 in cash back each year) and my Capital One Miles card. (Someday I will use those miles.) I occasionally use my Koh’s card, and that is it. I did have a Barnes and Noble card, but that went inactive. I have a recently opened Best Buy card. That is it, although I probably should check my credit report and make sure.

    • says

      Worth checking your credit report and seeing what’s out there. I guess I never check, b/c I check anyway once every several years when I refinance my mortgage or buy new properties. They show you everything during the process.

      AMEX blue cash… I’ll look into that!

    • says

      Just make sure to always keep open your longest running credit cards. Length of credit history is important for your credit rating. I made the mistake once of closing out a card I didn’t use anymore that also happened to be the first card I ever got. It ended up hurting my credit rating. I should have just kept it active by using it buy gas every now and then.

  6. says

    I think the effect that closing cards has on your score is over hyped so that people will instead keep them open. My mom closed the majority of her credit line (like 75%) last spring, and the effect was very minimal.

    I have 3 credit cards, but I only use my oldest one. I got the other two thinking I’d have a backup method of payment should someone not accept MasterCard (how naive of me :)). I plan on closing both newer cards as soon as we close on a mortgage. My credit score was 793 a year ago, so I’m trying to get it above 800 before applying. :)

  7. Investor Junkie says

    Open up a Target credit card. 5% off all purchases.

    There is the goldilocks with a FICO score. You can have too many cards open but yet have too little. I decided with many of my cards increased their rates (ahem..which were supposed to be fixed). closing the accounts in your case more than likely dropped your FICO at least temporarily.

    The screwed up logic with FICO is you would think the less cards you would be the less risky right? You are better having a huge amount of credit available to you that isn’t used, than having a small amount of credit that is almost used up. It’s the common saying “bankers only give loans to people who don’t need them” is the truth!

  8. says

    I have one particular card that I just don’t use, but I keep it open because I’ve been pounding away at increasing my credit score and don’t want to fudge up my score. Last year, I closed one card that I didn’t use and it didn’t seem to affect my score. However, I wanted to wait at least another year before I close out the other card I don’t use (I also pay a monthly fee on this card – to make a long story short, it was a card that originally helped rebuild my credit). Maybe later this year I’ll close it out and be done with monthly service fees!

  9. says

    It kind of bugs me that closing a line of credit that you don’t want or need anymore can hurt your credit score, but I guess that’s the game so we might as well play it. I usually never sign up for store cards, but your strategy of doing it on really large purchases is one I like a lot.

  10. says

    I have way to many credit cards in my file cabinet that are still open but that I never use. I usually use reward cards, but I do have 2 regular credit cards collecting dust somewhere.

    Great tips Sam, I’m now seriously thinking of shutting some of my old cards down.

  11. says

    I would hope for anyone that credit cards aren’t really used to access credit for longer period of time. Anyone should try to negotiate a line of credit before relying on a credit card. That’s how credit card debts accumulate.

    I have 2 credit cards:
    – VISA
    – Store Card used for gas and points

  12. says

    I’m to the point where I just really don’t care to think too much about my credit score anymore. I am 26 and my wife is 25. We just built a new house in 2010, financed by a 30 year fixed rate mortgage at 4.50%. Our goal is to make that the last loan we ever use.

    I understand that you need good credit to get good insurance rates, possibly get a job, etc. But if you at least have some sort of credit history (and its not all bad stuff), then you should be OK here.

    I think people in the US spend far too much time thinking about the almighty credit score. I think if you spend too much time obsessing over your credit score, you might be more likely to use debt (after all, you need to take advantage of that great score, right?).

    As for me and my wife, the days of needing an amazing credit score are (hopefully) done.

    If I were you, I wouldn’t worry to much about closing those cards.

    Bogey

  13. says

    I have a number of them that I do not use nor have a balance. I have a lot of cards, but only use 2-3 consistently. I pay them off every month. Two years ago I converted my unsecured line of credit into a HELOC in order to lower the interest rate. At that time B of A said I had a FICO score of 872. I questioned it because I thought 850 is the highest. They said there some people who exceed it. People need to learn how to deal with credit cards, just like money. If you were fat, would you give up food?

  14. Charlie says

    I’ve always had a low number of credit cards so it’s been easy for me to keep track. I didn’t know those things about how the credit limit and the history of the card can impact your credit report, that’s very good to know. I also keep a much closer eye on my credit card balance than a few years ago which helps a lot.

  15. says

    It’s good to be back here! Happy New Year! As for me, I have 4 credit cards right now but I am only using one of those 4.

    Credit cards provide a number of incentives for users and one of those is cashless purchases. However, people who are not disciplined enough to handle them might find themselves trapped in a financial loophole.

    For the annual fee, I usually asked the credit card companies to waived it for me. Otherwise, I will threaten them to have my cards cancelled. Anyway, I haven’t been using some of them so why charge for the annual fee? :)

  16. says

    I’ve had a few store cards too in my time, its easy to be tempted by the discount at the store counter! I’m all for getting the extra saving too although as I never use any of the store cards thereafter it can be kind of hard to keep track and I would be worried about moving address and forgetting to update my details with them!

    Now we just stick with our two main cards (easier to keep track of) – an Amex card because we got a good deal (no annual fee) and they have a great points scheme, and also a VISA card – because a lot of places (especially in Australia) don’t accept Amex. We use our credit card as much as possible to maximise the points, but make sure we pay off the balance each month as the interest rate is pretty high!

  17. says

    “To build a good credit score, you need to prove you can handle credit!Hence, even if you never use your credit card and hate credit, you should have one credit card open and never close it.”

    WTF, Sam? Never a valid reason to keep a credit card open. I’m not saying that we should not have a credit card for other purposes such as questionable and online transactions, but am saying that there are other ways to prove that we can handle credit without having a credit card.

    • says

      That’s right. I advocate people who know how to handle credit to have a credit card to use in their lives and not just walk around with just cash b/c they are afraid of their addictive tendencies to go overboard.

      Did you get in trouble once before w/ a credit card to elicit a “WTF” reaction? If you can’t control yourself, then by no means get a credit card. Better to go to rehab.

  18. says

    I checked a credit report a couple of years ago only to find that I had an open store credit card from years earlier at Best Buy when I had bought a TV and got the card to save 10% or something along those lines. I closed the account immediately, but it only underlines the importance of checking your credit every once in a while. You can do it for free every 4 months anyway, why not do it?

    Only credit i have left open is a cash back mastercard that i use only occasionally. All other credit is gone.

  19. JWizzle says

    For the most part I keep them, unless they charge an annual fee.

    However, this requires some maintenance. I substitute cards around for Amazon purchases every 3-6 months so they aren’t closed by the creditor.

    Having several open is a good idea if 1) each has a low credit limit and/or 2) you use up much of your monthly credit limit on normal purchases, making it appear that you’re consistently at high utilization, even if you pay them off every month.

  20. says

    Citibank closed an account of mine that had a $24K limit on it because of “inactivity”. I checked my credit score about 6 months later and my score actually went up 25 points. Credit score modeling has started to change significantly and keeping cards just because their “old” doesn’t carry as much weight as it used to.

  21. says

    I have one of those best buy cards that hasn’t been used for a couple of years and should close it. I just remembered it when I recently got a change of terms notice.

  22. says

    I closed my oldest card (about 10 yrs old?) after the new chip thing didn’t work and they told me I had 3 days to get to a branch – over a long weekend. Knee jerk I was ticked so I told ‘em to cancel it. Sort of wish I hadn’t now. I never use that card, but it WAS history. But it is good to know the history of that card remains for 7 yrs and by that time i’ll have 7 years history on the new (much better) card. My credit score is very high so not too worried …

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