Don't be hasty in closing unused account with $0 balance

It might be helping your credit score without you knowing it


Speaking of Credit
Speaking of Credit columnist Barry Paperno
Barry Paperno is a freelance writer and credit scoring expert with decades of consumer credit industry experience, serving as consumer affairs manager for FICO (formerly Fair Isaac Corp.) and consumer operations manager for Experian. He writes "Speaking of Credit," a weekly reader Q&A column about credit scoring and rebuilding credit, for His writings about credit scoring have appeared in The Huffington Post, MSN Money, CBS Money Watch and other consumer finance websites.
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Dear Speaking of Credit,
Hi there. I am 28 and my credit score is 811. I have three credit cards: one with a balance/limit of $1,000/$2,500 at 10 percent interest, which I love; one has a balance/limit of $2,500/$8,500 with 19.24 percent, that, although it's high, I like the benefits; and a third card, with a balance/limit of $0/$2,000 with 26.8 percent interest, that does nothing for me and that I regretted getting from Day 1.

My three questions are: 1) Should I close that third card and open another one? 2) What is my best option in getting a better card (my priority is to build better credit and not ruin my score)? 3) If I ask for a credit limit raise on my first card would it possibly affect my interest rate or credit in a bad way? I'd really appreciate it. I am extremely worried. I have never missed a payment, never paid minimum, and I would hate to mess up by doing something wrong. -- Nancy

Answer Dear Nancy,
Great score! In addition to reflecting good credit management skills, the fact that you're only 28 demonstrates that it doesn't take decades of credit experience to reach scoring heights. All that's needed are on-time payments, moderate card balances and a little time. Yet, I'll have to disagree with your comment that the third card you listed, charging 26.9 percent interest, does nothing for you.

True, that interest rate is nothing to brag about. And I agree that if it doesn't offer a rewards program or other benefits there may not be a good reason to use it. But considering that your other two cards have a combined credit utilization of 32 percent -- not terrible, but far from ideal -- being able to include a 0 percent utilized card ($0 balance and $2,000 limit) enables you to knock 5 percentage-points off of the combined utilization rate of your other two cards. Lower interest and rewards programs are good perks to have, but they do nothing to directly help your credit score.

The following illustration shows how the inclusion of that third card is helping lower your utilization. Without that third card, your credit utilization would jump from 27 percent to 32 percent:

  Balance Limit Utilization
Card 1 $1,000 $2,500 40%
Card 2 $2,500 $8,500 29%
Card 3 $0 $2,000 0%
Combined $3,500 $13,000 27%
  Balance Limit Utilization
Card 1 $1,000 $2,500 40%
Card 2 $2,500 $8,500 29%
Combined $3,500 $11,000 32%

With the ideal utilization being at 1-9 percent, and with utilization making up almost a third of your score (30 percent), your 27 percent utilization rate is clearly the weakest link in your credit picture. You don't want to do anything to raise it.

The good news is that there are at least a couple of the ways to lower it, with one, according to your questions, already being considered and the other also being one you should consider, since the first one won't significantly lower your utilization all by itself:

  • Add a new card that will increase the amount of available credit, the denominator in the balance/limit utilization equation. The inclusion of another card with a very low balance should cause your combined utilization to fall and your score to rise. If this doesn't occur immediately, then expect to see a higher score over the next six to 12 months, all other things being equal.
  • Lower your existing card balances by either paying in full each month, or, if you're already doing so, reducing the balances that appear on your monthly statement (the numerator in the utilization equation) by paying your charges before the following due date that precedes your next statement. By essentially paying early, you'll reduce the amounts appearing on the new statement, which will be the card balances reported to the credit bureaus and included in your credit scoring calculations.

I hope you'll find the following answers to your questions helpful:

1. Should I close that third card and open another one? As noted above, opening another card is a good idea, especially if it offers a good rewards program and/or a high limit. However, as for closing one, unless the reason for closing that third card is avoid paying an annual fee, be aware that the scoring formula ignores closed cards with a $0 balance in utilization calculations. That means by closing it you would lose the benefit to your utilization percentage that the card is currently providing.

Additionally, looking to the future, a closed card is removed from your credit report, and thus from credit scoring calculations, within about 10 years after closure. This could not only hurt your utilization, but also lower your average age of accounts and eliminate all other positive history associated with the account. So again, unless there's an annual fee to be saved by closing that third card, keep it open and active for the benefit of your score.

2. What is my best option in getting a better card (my priority is to build a better credit and not ruin my score)? Fortunately for you, with a score of 811 you should have the pick of the litter when it comes to choosing credit cards, any of which, with low utilization and timely payments, should help your score. If building a better score is your priority, try to get the highest credit limit you can. Unfortunately, this will not be easy, since most  card issuers don't reveal the credit limit you will get when you open a new account. Hopefully, though, you'll be able to get some idea of a limit range to expect from some card companies. If so, apply for the card with the best chance of the highest limit so you can charge higher amounts without endangering your utilization and lowering your score. 

3. If I ask for a raise of limit on my first card would it possibly affect my interest rate or credit in a bad way? A limit raise request shouldn't affect the interest rate or any other terms of an existing account. The only negative credit scoring impact might be from a hard inquiry if the issuer insists on checking your latest credit score in this way. Still, even if a few of those points are lost in the process, any such impact should be outweighed by the positive effect an approved limit increase will have on your utilization.

See related: Credit utilization: How this key scoring factor works

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Published: January 14, 2016

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Updated: 10-23-2016

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