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Which of My Credit Cards Should I Cut?

Eva Norlyk Smith Ph.D.

December 17, 2012

QDear Eva,

I have five credit cards right now, and it’s getting to be too much. I have a Capital One cash-back card I got a year ago and use all the time, so I definitely want to keep that one. I have a card I got five years ago that doesn’t get me rewards, but that has a higher limit ($10,000), so that one’s useful as well. The other three are: two store cards (Macy’s and Kohl’s) that never get used and a regular card with only a $2,000 limit — it was my very first credit card about 12 years ago, and I don’t actually use it anymore.

So what’s the best thing to do with those three other cards? Should I cancel them? Should I just not use them but keep them open? Is having open cards I never use bad for my credit score(t was at around 750 last time I checked? There are no balances on any of the cards, but it’s a pain to have to keep track of them all and keep them active. I really just want to keep the two cards I use. — Cindy

ADear Cindy,

The issue you face is a common one. It’s tempting to take advantage of all those great credit card offers out there — particularly store credit cards promising a 10 percent discount on your first purchase. But the upshot is that many people, like you, end up with a large portfolio of rarely-used credit cards.Ask Eva

Closing credit cards can be tricky, because, if you don’t go about it in the right way, it can lower your credit score. In your situation, it’s a little easier because you don’t carry any balances on your credit cards. That gives you some protection from the most common issue people run into when they close credit cards — getting their score nicked because their credit utilization goes up.

However, you still need to keep your credit utilization ratio in mind when closing credit cards because it can still affect your score, even if you never carry a balance forward. Credit utilization makes up 30 percent of your FICO score, so it’s a force to be reckoned with. Ideally, your balance should always be below 30 percent of the total credit limit.

The issue with closing cards is that, when a credit line is eliminated, credit card balances will make up a higher percentage of the total credit usage. For example, let’s say you have a total credit line of $25,000 across all five cards. If you close three credit cards and end up with, say, a total of $12,500,  any balance on the card will have twice the weight on your credit utilization ratio. Let’s say you were to charge $5,000 to your cards one month. With a $25,000 total credit limit, you’re still just using 20 percent of the overall credit available. However, after closing some of the cards, a $5,000 balance across your credit cards would be equal to 40 percent credit utilization.

Unfortunately, this is an issue even for someone paying the balance off in full each month, as you do. Credit issuers simply report the balance at a certain time during the month, and if you haven’t yet paid off the bill, the balance for that month will be included in your credit utilization ratio. Even if you rarely charge such large amounts to your credit card, it’s still something to keep in mind.

Most people run into periods of higher-than-usual credit card usage when purchasing big-ticket items, working on small home renovation projects or simply running into unexpected expenses.

The other factor to consider when closing credit cards is how it might impact the length of your credit history. Having a 12-year-old credit card is a big plus for your FICO score, as15 percent of your score is made up by the length of credit history.

There is no clear-cut rule for how much closing a credit card with a long credit history would affect your credit score. It depends on other factors, such as how long you’ve had the other credit cards and whether you have a history of regular payments on those credit cards.

So which is the best strategy for you to simplify your credit card portfolio? Well, you have a one no-brainer option and one tricky one. First the no-brainer: Close the two store credit cards; they likely have low credit limits, and because you never use them, they don’t do much for your credit score.

Secondly, you’re right to keep your Capital One rewards credit card because you use it all the time, as well as the card with the $10,000 credit limit. So that leaves you with the difficult decision about whether to close the 12-year-old card with a $2,000 credit limit.

Rather than closing that old credit card account, consider making the card work harder for you. Call the card issuer and ask if it is willing to raise the credit limit on that card. Most issuers should be willing to raise the limit considerably on a card you’ve had for that long if the card has a positive payment history, particularly if you tell them that the alternative is to close the card. Then, keep building up the credit limit on that card over time. Typically, you can ask for a credit limit increase once a year, so you can gradually build up the credit limit to a more useful amount.

Having at least two credit cards with high limits can be a great advantage should you ever need access to extra credit. It protects you from running up your credit utilization and sinking your score, when you need access to credit the most.

To keep the card active without having to bother with paying balances, consider using a set-it-and-forget-it approach: Charge one or two of your fixed monthly expenses to the card, and set the card up for automatic monthly payments from your bank account, so you never have to worry about paying the bill.

This approach would protect your score and put you in a better long-term position credit-wise. However, if it’s too much hassle, simply hold on to that old credit card; it’s better to keep a credit card with that long a credit history, even if used only once in a blue moon.