To Close Accounts or Not, That is the Question

There is conflicting advice around whether or not it will improve your credit score to close unused credit card accounts or revolving credit accounts.  Some advice will tell you not to close them, since having more open accounts without balances means you haven't maxed out your available credit- thus having a higher score than someone who has reached the maximum limits (or close to) on one or more accounts.  Other advice will tell you to close them because it lowers the amount of credit you have access to, therefore increasing your credit score.  How do you decide?

Making the Case to Keep Accounts Open

Many of the credit reporting agencies suggest that you do not close your accounts.  The theory that leaving your unused credit cards, loans, or paid off accounts in an "open" status as a way to improve your credit score comes from the fact that credit reporting agencies say a longer credit history improves your score. 

Of course, a teenager-just-turned-adult is going to have a lower credit score due to a limited credit history than someone who has established a few credit accounts over the years.  So it does seem to make sense that keeping the accounts open rather than closing them should work to raise your credit score.  Also, having many accounts with little debt on them helps improve your score, since it shows lenders you are financially responsible and do not charge your maximum amount.

Making the Case to Close Accounts

On the other hand, the only information that is supposed to be used in calculating your actual credit score is supposed to be activity within the last two years.  Except for bankruptcies- financial transactions older than 7 years should be removed completely from your report.  So, if you were to close each of your accounts as soon as you're finished paying them off or when you decide you are not planning to use the account, the closed account will still remain on your credit report for a period of 7 years. 

Some accounts charge an annual fee, even if you aren't using the credit card.   Paying an annual fee on an account you don't use seems like a waste of money. Additionally, lenders might look at your credit report and see you have several open accounts with room to spend- and see that as a danger sign.  Even if you haven't reached your maximum limits on each of those accounts- that is money you have easily available to you and if a lender provides you with additional money- there is no telling whether or not you are going to turn around and spend the rest of your available credit and then run into financial difficulty trying to keep up with the payments.  Many lenders would prefer to lend to individuals with less available credit.

If you make your payments on time for credit you've obtained and keep your credit within your comfort zone, closing an account or keeping it open should have very little effect on your credit score.  If you've over extended yourself and have had too many credit cards it is probably in your best interest to close accounts that are not going to be used, and focus on keeping your payments current and balances well below the maximum available on the accounts that you are using.