Why You Should Never Close Your Oldest Credit Card

Introduction

In today's world, misinformation about credit cards and credit scores runs rampant. Many people hold beliefs that could hurt their financial health, especially concerning the importance of credit history. One common piece of advice you may hear is to close old credit card accounts to simplify your finances. However, this advice could actually be detrimental to your credit score and long-term financial goals.

Myth: Closing Your Oldest Credit Card Will Simplify Your Finances

Reality: It Can Hurt Your Credit Score

Many people believe that having fewer credit cards makes their financial life easier. While it’s true that managing fewer accounts can reduce confusion, closing your oldest credit card can negatively impact your credit score. Your credit score, particularly your FICO score, is partly based on the length of your credit history. When you close an account, especially one that’s been open for a long time, it shortens your overall credit history.

For example, if your oldest credit card has been open for 10 years and you close it, your average account age might drop from 5 years to 4 years, which can hurt your score. A FICO score of 714 is considered good, but if closing that account drops your score to 680, you might find it harder to secure loans or qualify for better interest rates.

Myth: You Should Close Accounts You Don’t Use

Reality: Inactive Accounts Can Still Benefit You

It’s common to think that if you’re not using a credit card, it’s better to close it. However, inactive accounts can still contribute positively to your credit profile. Not only do they help with your credit utilization ratio (the amount of credit you’re using compared to your total available credit), but they also add to your credit history length.

For instance, if you have a credit card with a $5,000 limit that you haven't used in a year, closing it might increase your credit utilization if you only have other cards with a total limit of $10,000. This could push your utilization from 30% to 50%, which can ding your credit score. Instead, consider using the card occasionally for small purchases and paying it off immediately to keep it active.

Myth: A Closed Card Will Not Affect Your Credit Report

Reality: Closed Accounts Can Still Appear on Your Report

Some people believe that once they close a credit card, it disappears from their credit report. In reality, closed accounts can remain on your credit report for up to 10 years. While this means they won’t impact your credit utilization ratio anymore, they can still play a role in your credit history length.

If you close your oldest credit card, that account will no longer contribute to your average age of accounts, which is a key factor in determining your credit score. This can be particularly important if you’re planning on making a significant purchase, such as a home or car, where lenders will look closely at your credit history and score.

Myth: You Should Only Have One or Two Credit Cards

Reality: Having Multiple Cards Can Improve Your Credit Utilization

Another prevalent myth is that you should limit yourself to one or two credit cards. While it’s true that having too many cards can lead to overspending, having multiple accounts can actually benefit your credit utilization ratio. This ratio is calculated by dividing your total credit balances by your total credit limits, and it makes up about 30% of your FICO score.

For example, if you have three credit cards with a total limit of $15,000 and a balance of $2,000, your utilization is about 13.3%. However, if you close one of those cards, say a $5,000 limit, your new limit becomes $10,000, and the utilization ratio jumps to 20%, which may negatively impact your score. Aim for a credit utilization ratio below 30% for optimal scoring benefits.

Myth: You Don’t Need an Old Credit Card if You Have New Ones

Reality: Old Accounts Are Crucial for Your Credit History

People often assume that newer credit cards can replace older ones in terms of credit history. However, the age of your credit accounts is vital. Lenders like to see a long and stable credit history that proves you can manage credit responsibly over time.

For example, if you have a new card with a high limit but it’s only been open for a year and you close your 10-year-old card, lenders may view this negatively. Having a mix of both new and old accounts can give a fuller picture of your creditworthiness, making you more attractive to lenders.

What Should You Actually Do?

Now that you’re aware of these myths and realities, here are some actionable tips:

• Keep Your Oldest Credit Card Open: If possible, keep your oldest credit card active to maintain your credit history.
• Use Inactive Cards Occasionally: Consider making small purchases on cards you don’t use often. Just make sure to pay them off each month to avoid interest.
• Monitor Your Credit Utilization: Aim to keep your credit utilization ratio below 30%. If you’re planning to close a card, check how it will impact your overall utilization first.
• Check Your Credit Reports: Regularly review your credit reports from the three major credit bureaus—Equifax, Experian, and TransUnion—to ensure all information is accurate.
• Be Strategic with New Cards: If you’re considering applying for new credit cards, do so strategically to avoid unnecessary hard inquiries that can impact your score.

By keeping your oldest credit card open and understanding the real impact of your credit decisions, you’ll be in a stronger position to build a solid financial future. Remember, knowledge is power when it comes to managing your credit!