Why You Should Never Close Your Oldest Credit Card

Why You Should Never Close Your Oldest Credit Card

When it comes to managing your credit cards, one of the most common questions people ask is whether they should close old accounts. You might think that closing an unused account is a good way to simplify your finances, but in many cases, it's the opposite. Understanding why keeping your oldest credit card open can benefit your financial health is crucial. Here are five compelling reasons to reconsider closing that card.

1. Length of Credit History Matters

Your credit score is influenced by several factors, one of the most significant being the length of your credit history. This is where your oldest credit card comes into play. The longer your credit accounts have been active, the better it reflects on you as a borrower. When you close your oldest card, you effectively shorten your credit history, which can negatively impact your FICO score.

For example, let's say you have three credit cards: one opened in 2010, another in 2015, and a third in 2020. If you decide to close the 2010 card, your average credit age drops, which could decrease your score significantly. Given that the average FICO score in the U.S. is 714, keeping your oldest account can help you stay above that threshold.

2. Utilization Rate Benefits

Your credit utilization rate, which is the ratio of your credit card balances to your credit limits, plays a crucial role in determining your credit score. A lower utilization rate is better for your score. When you close an old card, you reduce your total available credit, which could lead to a higher utilization percentage if you carry balances on other cards.

For instance, suppose your total credit limit across three cards is $10,000. If you have a $2,000 balance on one of those cards, your utilization rate is 20%. But if you close your oldest card with a $5,000 limit, your total limit drops to $5,000. Now, that same $2,000 balance gives you a 40% utilization rate, which is likely to harm your score. Aim to keep your utilization below 30% for optimal credit health.

3. Impact on Credit Mix

Credit scoring models, especially FICO, also consider the variety of credit types you have, known as "credit mix." Having a mix of credit accounts (credit cards, installment loans, etc.) can positively influence your score. If your oldest credit card is your only credit card, closing it removes diversity from your credit profile.

For example, if you only have one credit card and several student loans, closing that card might make your profile appear less favorable to lenders. Instead, keep that old credit card open to maintain a healthy mix, which can be particularly beneficial when you're seeking a mortgage or car loan in the future.

4. Rewards and Benefits of Old Accounts

Even if you don't use your oldest credit card often, it might still offer valuable rewards or benefits. Many credit cards come with perks like cash back, travel points, or extended warranties on purchases. By keeping that card open, you can continue to take advantage of these offerings, even if only occasionally.

For example, if your old card is a Chase Freedom Unlimited, it offers 1.5% cash back on every purchase. Even if you're not using it as your primary card, having it for occasional purchases can earn you rewards without affecting your spending habits. Plus, many old cards have lower interest rates or no annual fees, making them more advantageous to keep around.

5. Easier to Manage Future Credit Applications

When it comes time to apply for a significant loan, such as a mortgage, having a longer credit history can work in your favor. Lenders often look at your credit report and history to assess your reliability as a borrower. If they see you have maintained old accounts responsibly, they may be more likely to extend you credit.

For instance, if you apply for a mortgage and your credit report shows a credit history stretching back over a decade, it demonstrates stability and reliability. On the flip side, if you've closed your oldest card and your credit history is relatively short, you may face higher interest rates or even denial of your application. It's essential to think long-term when it comes to credit management.

6. Alternatives to Closing Old Accounts

If you're considering closing your oldest credit card due to high fees or a lack of use, there are alternatives to consider. One option is to contact the card issuer and ask for a downgrade to a no-fee version of the card. Many issuers, like Chase and American Express, offer options that can help you maintain your account without incurring costs.

Another option is to use the card for small, recurring purchases, such as subscriptions or utility bills. This keeps the account active without significantly impacting your budget. Just be sure to pay off the balance each month to avoid interest charges.

Bottom Line

In summary, closing your oldest credit card can have unintended negative consequences on your credit score, credit utilization, and overall financial health. By keeping that account open, you can maintain a longer credit history, benefit from lower utilization rates, and enjoy the perks that come with older cards. Instead of closing the account, consider alternatives that allow you to keep your credit profile strong. Remember, your credit score is a long game, and every decision counts!