I have a bunch of credit cards with no balance, while others have fairly high balances. I'd like to close the 0 balance cards, but I know that will reduce my overall balance and hurt my credit rating, since my ratios of used to unused credit will rise.
Is it ever a good idea to close credit cards?
Yes, it can be a good idea to close unused credit cards. I am going to give some reasons why it can be a good idea to close unused accounts, and then I will talk about why it is NOT necessarily a bad idea.
Why it can be a good idea to close unused accounts
"I'd like to close the cards." That is reason enough.
Simplifying your financial life is a good thing. Fewer accounts let you focus your energy on the accounts that you actually use.
Unused accounts still need to be monitored for fraud.
You mentioned that you have high credit card balances that you are carrying. This may indicate that you have trouble using credit responsibly, and having more credit available to you might be a temptation for you.
If these unused cards have annual fees, keeping them open will cost money.
Unused cards sometimes get closed by the bank due to inactivity. As a result, the advice often given is that, in addition to not closing them, you are supposed to charge something to it every month. This, of course, takes more of your time and energy to worry about, as well as giving you another monthly bill to pay.
Why it is NOT necessarily a bad idea to close unused accounts
Other answers will tell you that it may hurt your credit score for two reasons: it would increase your utilization and lower your average account age. Before we talk about the validity of these two points, we need to discuss the importance of the credit score.
Depending on what your credit score currently is, these actions may have minimal impact on your life. If you are in the mid 700's or higher, your score is excellent, and closing these cards will likely not impact anything for you in a significant way.
If you aren't that high in your score yet, do you have an immediate need for a high score? Are you planning on getting more credit cards, or take out any more loans? I would suggest that, since you have credit card debt, you shouldn't be taking out any new loans until you get that cleaned up. So your score in the mean time is not very important.
Are you currently working on eliminating this credit card debt? If so, your utilization number will improve, even after you close these accounts, when you get those paid off. Utilization has only a temporary effect on your score; when your utilization improves, your score improves immediately.
Your average account age may or may not improve when you close these accounts, depending on how old they are compared to the accounts you are leaving open. However, the impact of this might not be as much as you think.
I realize that this advice is different from other answers, or other things that you may read online. But in my own life, I do a lot of things that are supposedly bad for the credit score: I only have two credit cards, ages 2.5 and 1.5 years. (I closed my other cards when I got these.) My typical monthly utilization is around 25% on these cards, although I pay off the balance in full each month, never paying interest. I have no car loan anymore, and my mortgage is only 4 months old. No other debt. Despite those "terrible" credit practices, my credit score is very high.
Conclusion
Make your payments on time, get out of debt, and your score will be fine. Don't keep unwanted accounts open just because someone told you that you should.
It is an issue of both utilization and average age of accounts.
If your cards with $0 balances on them are:
A) newer cards than the ones you are carrying balances on and you don't want them
B) much lower limit cards than the ones you are carrying balances on
then you can raise your score by closing them, as the utilization change won't be a large factor and you can raise the average age of your open accounts.
In my own case, my credit score went up drastically after I closed cards. It did go down a bit (like 10 points) in the short term. Within 6 months, however, I did see significant gains. This would include closing the American Express card that I had for like 10 years. According much of what I read, you should never close a AMEX card. I did and it did not hurt me.
What helps all this is that my utilization is zero.
In your specific case, I would leave them open unless you have a specific reason for wanting to close them - particularly, unless you feel closing them is necessary for you to not misuse them.
The impact on the credit score is not why I say this, though. Much more important are the two competing real factors:
My suggestion would be to take the cards and put them in your file cabinet, or whatever would cause you to not use them. In fact, you could even cut them up but not close the accounts - I had an account open that I didn't possess a physical card for several years for and didn't use at all, and it stayed open (though it's not guaranteed they'll keep it open for you if you never use it). In an emergency you could then ask them to send you a new copy of the card very easily. But, keep them, just in case you need them.
Once you have paid off your balances on your balance-carrying cards, then you should consider closing some of them. Keep enough to be able to live for ~4-6 months (a similar amount to the ideal rainy day fund in savings, basically) and then close others, particularly if you can do so in a way that keeps your average account age reasonably stable.
There is also security aspect. By reducing the number of active credit/debit cards, one significantly reduces the surface of attack. There is smaller chance of getting one of your card information stolen and misused (cf Target data leaks and others).
There's no harm in keeping them open. Like you said, closing the lines will potentially hurt your utilization. The extent of that impact will depend on your particular situation.
There are situations where closing a line will have no actual impact on your utilization. If you have 100k of open credit and a debt load of $2k, if you close a $10k line you won't really have an issue because your utilization is 2% and closing the line will take you to 2.2%.
Assuming that a person has good financial discipline and is generally responsible with spending, I think that having a few hundred or thousand dollars extra of available credit is usually worth more to that person for the choice/flexibility it provides in unforeseen circumstance, versus the relatively minor hit that could be taken to their credit score.
I'm not sure if someone else answered already in the same manner I will. I can't guarantee for sure if it's the same in the U.S.A. (it might since major credit cards companies like Visa/MC/AMEX are American companies) but in Canada having/keeping unused CC is a disadvantage because of the following:
Banks and financing companies look more at the total amount of credit available to you than at how much purchases you have on your cards.
Ex: Let's say that you have the following: - Visa cc with $10,000 limit and $2000 worth of purchases (made more than 30 days ago) on it. - Mastercard cc with $10,000 limit as well and $1000 worth of purchases (less than 30 days old) - A major retail store cc with $2000 limit and $0 balance.
Hypothetical situation: You want a bank loan to do some expensive house repairs and are looking for a lower interest rate than what your cc can offer. The bank will not care about the amount on the cards. They will add-up all the limits of your cc and treat your loan request as if ALL your cards were filled to their respective limit. So in this case: they will consider you as being right now in debt of $10K+$10K+$2K = $22,000 instead of only $3000 and they might: 1. refuse you the loan 2. grant it only if you transfer all purchases on a single card and cancel all the others. 3. Once the $3000 is transferred on one of the cards (and the others cancelled), they can require that you reduce the limit of that card.
Hope this helps!
The only good reason I find to close cards are:
it's a card with an annual fee that you don't need. No point bleeding money each year.
churning rewards. Open card to get bonus promotion such as "spend $500 in first 3 months, get $200 bonus". Close card and open a year later to do that same bonus again if available. Many cards don't allow you to do this.
making room for newer cards at the same bank. Example, you have 5 Chase Cards and you want to apply for a 6th. Chase says you have maximized your credit they will extend you. You close one of your existing cards to get that new card. I have seen that many banks allow you to shift over some over your existing available credit to your new card without having to close them.
Credit scoring has changed recently and the answer to this question will have slightly changed.
While most points made here are true:
But now (as of July 2017) it is possible having a large available credit balance can negatively effect your credit score directly:
... VantageScore will now mark a borrower negatively for having excessively large credit card limits, on the theory that the person could run up a high credit card debt quickly. Those who have prime credit scores may be hurt the most, since they are most likely to have multiple cards open. But those who like to play the credit card rewards program points game could be affected as well.
I'd say close them if they have fees, if you're worried about fraud or if you're going to be tempted to use them. It may have an affect on your credit rating, but it shouldn't hurt you seriously. Having too many cards gives you the "opportunity" to overspend, which obviously isn't good.
You mentioned you have
a bunch of credit cards with no balance, while others have fairly high balances
I would not recommend you to close the 0 balance credit cards if they have lower APR. You can transfer the balance to those cards with lower APR. Now, if those 0 balance cards do not have lower APR, closing them
will reduce my overall balance and hurt my credit rating
and that is true, assume that you mean overall credit line instead of overall balance. But to my understanding, if you keep the payments good and on time, that effect is only temporary, and therefore you can definitely close them.
Don't forget, paying off your balance can also lower your utilization rate and therefore increase your credit ratings, and you can focus more on that instead. Also larger number of accounts with amounts owed can indicate higher risk of over-extension, therefore you should pay off your low balance accounts first, and do not open new credit accounts until you have paid off the current balance.
