You may have heard experts say you should never close a credit card, as it could damage your credit score. Others may say you simply need to choose one credit card to keep open forever. Which of these theories is correct? To answer this question, we need to examine the importance of your credit history length to your credit score.
Credit scores and account history
The Fair Isaac Corporation, or FICO, is the most popular credit scoring formula. While the exact formula has never been revealed, the organization has disclosed the general framework for determining your score:
- 35% – Payment history
- 30% – Amount of debt owed
- 15% – Length of credit history
- 10% – New credit
- 10% – Credit mix
Of these five factors, only 15% of your credit score is determined by your length of credit history. Additionally, several components are used to make up this 15%. One factor is how long your credit accounts have been opened, including your oldest and newest accounts. Second, the average age of all of your accounts is examined. Lastly, FICO looks at how long certain accounts have been open and how long it has been since they were last used.
Thus, even within 15% of your overall score, only a small portion is determined by your length of credit history. So, it is likely that less than 10% of your FICO score is made up of how long any single card has been open. Much more important is your payment history and the amounts owed, which make up 35% and 30%, respectively, of your score. These are at least twice as important as all other factors combined.
Should you keep an account open to improve your credit score?
While your length of credit history is not a massive chunk of your credit score, should you still consider it when deciding whether to keep an account open? This may depend on the card in question. If a credit card carries an annual fee, the only reason to keep it open is if the value of the rewards you are receiving is equal to or exceeds the cost. Additionally, if you can find a card that offers similar benefits without the annual fee, it is a good idea to close your current account. Since many card issuers offer credit cards with no annual fee, there is no reason to pay this fee for a card you do not use, just to show a slightly longer credit history.
One exception is young people, recent immigrants or those new to credit who may have a very limited credit history. For these people, it is important to establish a long credit history, which you can only achieve by keeping multiple credit card accounts open. Still, it is ideal to find cards with no annual fee.
Remember what is important
Credit card experts can debate until they are blue in the face about the importance of the average length of credit history. However, since the actual FICO score formula is unknown and your main goal is simply to earn a high credit score, the debate is not as important for the average consumer. The best thing you can do is focus on the two most important credit score factors: keeping a low debt level and making all of your payments on-time. Keep a low debt-to-credit ratio by striving to use no more than 30% of your available credit on all accounts. To keep a perfect payment history, use payment reminders or automatic electronic payment options offered by your issuer. If you can do these two things, your credit will start to improve.
It is unlikely that opening or closing a single account will lower your score by more than a few points, which could happen each month anyway due to all of the factors that make up your score. It is also important to remember that each of the three major consumer credit bureaus will apply a different scoring formula, so your score may vary among the three.
When you consider the limited impact of closing a credit card, you will be better able to decide whether to keep a card open.