NEW YORK (MainStreet) — You've probably heard this advice: never close a credit card account. It will negatively impact your overall credit score. The age of your credit history is important, as is the amount of available credit. But how accurate is this advice? Is there ever a reason to close a credit account? You might be surprised to find out there are times when closing your credit cards can be a good thing.
Do You Have an Account With Fees?
Mike Sullivan, director of education with Take Charge America, notes that not all cards are just sitting there aging your credit like a fine wine. "I closed one account because it was costing me $250 a year." In fact, high-end travel and other rewards cards often come at a very heavy price. "If it's expensive and you're not using it, cancel it."
No matter what you’re paying, it's not worth what it's doing to your credit score. But before you close out the account, give the customer service department a call. They might be able to work out a deal and waive the fee for a year.
Has Your Card Been Compromised?
"If you've had false charges put on it, the easiest way to deal with that is to cancel the card," Sullivan said.
Why not just order another card from the same company?
"If they're not protecting you and watching your back, just close it,” Sullivan says. Before you cancel for this reason, ask yourself if it's the company's fault. For example, a big box store getting hacked is on them -- or more likely a third-party security firm -- not your credit card company.
Does the Card Facilitate Problem Spending?
Sullivan thinks store cards are a huge culprit when it comes to compulsive spending.
"A lot of people get hooked on store cards," he says. This is because of the intense deals often offered for using the card. "Sometimes you go shopping just to use the card," he says. If this is the case, go ahead and shut down the card. Store cards have notoriously bad interest rates anyway, so unless you're walking around with a 30-year-old Sears card in your wallet, its probably not worth having.
"If you opened a Sears account in 1984, it's probably helping your score in ways you can't really imagine," says Randy Padawer, a consumer advocate with LexingtonLaw. But the Kohl's card you opened last summer isn't going to have nearly the same impact.
Do You Just Have Too Many Accounts?
Some people have a sense that you can have too many credit accounts. However, they don't really know how this plays out in concrete specifics. Actually, few, aside from the people who work on credit score algorithms knows exactly. But there is one broad guideline: You can have too much credit.
"It came up on my credit report as a warning," says Sullivan. "I had too much available credit."
You might run into this when pulling your credit score. More likely, however is that you're going to run into when you apply for a mortgage.
"There’s not an absolute number," he says. "But if you have $500,000 in credit, lenders might look at you and ask 'why are you collecting this much credit?'" Sullivan believes that lenders aren't so much worried that you’re going to default. "The concern is that you're going to do something illegal, fraudulent or simply unwise."
And while the credit scoring agencies don't know your annual income, they can begin to extrapolate it from your credit levels and behavior.
Padawer adds another scenario: not the amount of credit, but the number of accounts you have open.
"If you have ten different cards, each of them with very low lines of credit, that's not a good thing," he says. "What you're probably doing is maxing them out and paying them down over and over again."
That's not behavior that will make you look like a good and responsible credit consumer.
"It paints a picture of you as someone who maxes out their cards just to get by," he says. "You're better off having one credit card with a $15,000 limit you're using 20% of every month."
If you find yourself in that situation, start by closing newer accounts and leaving older ones open.
"Become acquainted with all the factors in a credit score," says Padawer. "Make good judgments accordingly."
-- Written for MainStreet by Nicholas Pell