One of the best things you can do to build awareness of your financial condition is to view your credit report. Your financial condition — as perceived by potential lenders — can cost or save you thousands of extra dollars throughout your credit repayments, such as the life of a mortgage, for instance.
You can get them for free these days, too. In fact, you are entitled to three credit reports, one from each of the three major reporting bureaus, each year. You can either get them all at once or visit annualcreditreport.com (the government’s official free credit report source) three times a year, to space the credit reports out evenly. Personally, I prefer the latter approach.
What You’ll Probably Find
Well, if your credit report is anything like mine, it contains a list of credit cards with basic information like partial account numbers, a credit limit, and payment history. Some probably date back to college, when you signed up for a credit card in exchange for a free t-shirt at freshman orientation. You may not even know where to find the actual credit card anymore.
For example, here’s a snapshot of one of my own records. This card account hasn’t been touched since 2011, but here it is, on my 2017 report:
There are a number of reasons that I keep this card active, though.
Reason 1. It’s one of my oldest accounts. I opened this card back in 2005 when I was a college freshman (cliché, I know). It’s the second oldest credit card I have, and even though I don’t use it, I like to keep my credit score’s Average Age of Accounts as high as possible.
Average Age of Accounts and How Your Credit Score Is Calculated
Were I to cancel this card, that number — an average of the credit length of all my revolving accounts — would go down. No, it wouldn’t be substantial, but I would still rather avoid it unless necessary. Which leads me to…
Reason 2. It doesn’t have an annual fee. Since I don’t use this credit card, it just sits around collecting dust (actually, I shredded it years ago, so that’s just a figure of speech). It doesn’t have any sort of fees involved, so I’m alright with that. However, if I were being charged an annual fee to hold the account, I would close it faster than you could say “Semi-Annual Sale.”
Many rewards credit cards do have annual fees; whether they’re worth it or not is up to you. If you’re using the card and earning great cash back (that more than negates the fee), go for it. If not, then you’re just throwing money away. And with a mere $1,000 credit limit impacting my credit utilization ratio, it wouldn’t be worth my cash to keep the account open.
Before closing an unused card due just to an annual fee, though, try calling the issuer. Sometimes, they will be willing to waive the cost for you — at least for that year — just to retain your account. Others may have a version of the card that doesn’t have an annual fee, and would happily switch your account over to that product instead. It would keep the benefits of the account on your credit, while avoiding the unnecessary drain of a fee every 12 months. Win-win.
Reason 3. I am still paying off balances on other cards. That credit utilization I just mentioned? This is where that comes into play.
If you don’t hold balances on any of your other accounts (i.e.: you have no credit card debt), closing a card like this won’t really impact you. I, on the other hand, am still paying off some old credit card balances… so closing an account with a $1,000 limit would ding my credit score in yet another way.
This is because of my debt-to-available credit ratio. Also called credit utilization, this is the ratio of how much debt you owe (your balance) versus your line of credit (the available credit). Let’s look at an example.
- If you have three credit cards, adding up to a total of $10,000 in available credit, but keep a $0 balance on each one, closing a $1,000 limit card won’t hurt. Your utilization will remain at 0%.
- However, if you have $10,000 in credit but hold balances adding up to in $5,000 in debt, your ratio is already 50%. If you close down that $1,000 card with a $0 balance, your debt-to-credit ratio just jumped up to 55.6%!
So, take into account where your credit already stands before closing an unused card. If you don’t hold any debt, you’re probably fine to close the card and won’t notice much of a difference. If you need that line of credit to boost your utilization, or need the account to factor into your average age of accounts, perhaps it’s worth keeping the plastic around.
Still Want to Close the Card?
So, the above reasons don’t impact you, and you’re still ready to cut up some cards? Go right on ahead… but take these three steps into account.
Step 1. Save your best, oldest card. Find the credit card with the longest, cleanest history, and keep this card. If you don’t know where the credit card is, call the company to update your address information and ask them to send you a new card. This probably isn’t the card you want to use moving forward, though. Just keep the credit history clean, and spend on/earn rebates with newer cards.
Step 2. Close all other inactive accounts. You can do this by calling the phone numbers that are listed with the information for each card. If you have an active card with the same company, ask to move your credit limit from the inactive card to the active card, and then close the inactive card. This will keep your credit history long and your credit report short.
Step 3. Choose the best card to use. If you are struggling to get out of debt, you should choose a low-interest card with no perks. If you are managing your money well, this should be the card that offers the best perks (like cash back, airline miles, etc.) for you and your lifestyle.
Try looking through lists of cards like
- 50 cards offering 0% APR on purchases
- Best credit cards for airline miles
- Rewards credit cards for drivers
- Best cards for 0% balance transfers
- Credit cards with cash back and no annual fee.
You may not have to apply for a new card if you already have one by the same lender; just call customer service and ask to convert your card. They may have some additional options for you, too.
How to Get Your (Legitimately) Free Credit Report
If you want to improve your credit score and get the lowest mortgage rates, the bottom line is you want to keep your oldest, cleanest credit card to show a long, solid history of responsible credit. You also want to have a low debt-to-income ratio and credit utilization ratio (by paying off your balances every month).
Doing these will help you to improve your credit score, qualify for the best interest rates, and receive some of the best credit products (such as rewards credit cards).
Updated March 25, 2017 and originally published March 20, 2017.
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