Canceling new card won't restore credit score
The damage is already done, canceling won't undo it
By Barry Paperno | Published: February 2, 2017
Speaking of Credit
Dear Speaking of Credit,
I have three credit cards with average age of 15 months. My credit score was excellent. I applied for a new credit card from at a store four days ago. I got the approval, but it has impacted my credit score negatively. Regardless of the hard inquiry, I want to cancel it to regain the age of my credit history and higher credit score. If I close it, will I regain my previous score? What’s your suggestion? – Hanna
One of the great things about having an excellent credit score is that for the most part you can just continue to manage your credit as you’ve always done, often without even giving it much thought. Another great thing about an excellent score is that as long as payments continue being made on time and credit utilization (card balances/credit limits ratio) is kept as low as possible, the score can recover relatively quickly – typically within six months – from some of the lesser “offenses,” such as opening new accounts.
But can you simply go back to your previous score by closing this new card? Unfortunately, credit scoring is not that simple. First, there’s that hard inquiry on your credit report from the credit check leading to approval of your application. Inquiries from card applications can be expected to take about five points from your score and continue to do so during the first of the two years they remain on your credit report. Unlike inquiries from mortgage, auto and student loan applications, where multiple inquiries for the same loan are considered as just one by the scoring formula, all card inquiries incurred during the past year can count in your current score.
The second reason closing your card won’t help your score is that as soon as your application was approved, the account was probably submitted to all three credit bureaus – Equifax, Experian and TransUnion – to be added to your credit reports. Once a new account has been reported to the bureaus, closing it isn’t likely to lead to removal. Your credit file will simply be updated to indicate the card has been “closed by the consumer.”
While common sense may say that closing this new card should help undo the damage to your score by making it less likely that you’ll go more deeply into debt, it won’t. Not only does closing the card do nothing to remove either the inquiry or new account that left your score lower, closing it won’t prevent the card’s very short credit history from unfavorably impacting the scoring calculations – average account age, oldest and newest account age, for example – that make up the length of credit history scoring category (about 15 percent of your score).
In fact, even if you never once use this card, it is likely to remain on your credit report for many years to come. If closed, it will only stop being a scoring factor when the account is eventually removed from your credit report about 10 years after closing. If left open and kept in good standing, the card could remain with you forever.
While it’s too late to rewrite this latest piece of your credit history, I have a couple of suggestions for you:
- Since closing the card won’t help your score, you may simply simply want to leave it open – whether you use it or not. Though doing so won’t provide any immediate scoring benefit, you could see some long-term advantage by allowing the card to remain on your credit report long enough to become one of your oldest accounts. And then there’s the reason you opened this store card in the first place. If you applied because the card provides the convenience, sales or discounts only available to the store’s cardholders, this could be another valid reason to just leave it open.
- If the writing on the wall isn’t crystal clear by now, avoid opening any new accounts for the time being. Such restraint could be particularly worthwhile if you plan on applying for a mortgage during the next year, as lenders like to see you go at least six months without having opened any new accounts. If you need to take on new credit, plan for at least a slight initial drop in your score followed by the recovery of those points within six months or less.
- Continue to pay on time each month.
- Maintain low utilization low on all cards.
- Keep those new accounts to a bare minimum.
Before you know it your excellent score will be excellent again!
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