Question: I have four credit cards. One for work expenses, one for personal expenses, a specific store card and then one other. This other card does not get used and has a zero balance. Does this hurt my credit scores to have this credit card with zero activity? Would it hurt my credit scores more if I closed this account? -- Beth
Answer: If your primary goal is maintaining your credit scores, you should leave that extra card open -- but not unused.
Based on the list of cards in your wallet, I'd guess the card with zero activity is one you keep in case of emergencies. Having an emergency card is a smart move, since that plastic could come in handy when an unexpected event catches you without enough cash.
Therefore, unless that extra card is causing legitimate problems -- such as charging you an annual or inactivity fee, causing excessive temptation to spend or posing identity theft concerns -- there probably isn't a good reason to close that account. After all, "a zero balance on a credit card account won't hurt your FICO score," but closing an account could, says Craig Watts, a spokesman for Fair Isaac, the company that created the most commonly used credit score.
In recent months, lenders have become eager to close accounts in an effort to protect their profits. Alternately, the card issuer could "begin demanding that the consumer charge X amount to keep it open," says Gail Cunningham, the vice president of public relations for the National Foundation for Credit Counseling.
Regardless of who closes an account, your credit scores may fall due to a change in a key credit scoring ratio.
"Closing an account causes you to lose the available credit limit associated with it. Your utilization rate, also called your balance-to-limit ratio, will increase as a result of closing the account. That may cause a temporary decline in your credit scores," says Rod Griffin, the director of public education for credit bureau Experian. That's an important consideration if you're about to apply for a loan.
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To get an idea of how your utilization ratio could be affected by closing an account, let's say each of your four cards has a credit limit of $1,000, for a combined total of $4,000 in available credit. Let's also say that across those four accounts, you've got a total debt burden of $2,000. Then your unused card gets closed, taking your available credit down to just $3,000. Now, instead of using 50% of your credit lines, you're suddenly using 67% of your available credit. That higher proportion makes you appear to be a riskier borrower, because you're that much closer to maxing out your available credit.
Your credit scores will reflect such a change, although the actual scoring damage will vary from borrower to borrower. "The FICO score assesses all the information on your credit report. So the score impact from any one action, such as closing an account, will depend on what other information is present on the credit report," Watts says.
Luckily, using that emergency card even semiregularly could prevent its closure by the bank -- and could help your credit scores in the process. For example, you could charge a recurring subscription fee, such as Netflix, or a monthly cost, such as your cell phone bill, to your emergency card. By putting such regular charges on your plastic, you "won't be actually taking on additional debt but should keep the card alive," the NFCC's Cunningham says.
Just be sure you always pay your bills on time and in full, since those two steps are necessary for building good credit. "Keeping the account open, using it to make small purchases and paying the balance in full each month is a good way to maintain your credit scores and might help improve them, especially if you've had recent credit problems," Griffin says.
If you've been a responsible borrower, it's unlikely that an account closure would have much impact. Because the most important steps for good credit involve making payments on time, not carrying excessive debt and applying for new loans only when necessary, "closing one card is much less likely to affect your FICO score," Watts says.
Published May 14, 2010
