Q&A: Will closing old, annual-fee card hit my score?

The impact of closing this account will depend on your credit utilization and length of credit history

The Credit Guy columnist Todd Ossenfort
Todd Ossenfort has been chief operating officer for Pioneer Credit Counseling since 1998. He writes our weekly "The Credit Guy" column, answering reader questions about credit counseling and debt issues.

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Question

Dear Credit Guy
I have a Credit One credit card that has not had a charge on it in quite some time. Yet, the company is charging me $8.41 a month for an “annual fee.” How can I get out of this madness? I don’t want to hurt my credit, but I’m paying every month for a card I’m not even using. – Terri

Answer

Dear Terri,
Although I normally advise my readers not to close credit cards, in this instance my advice is to close this account, sooner rather than later. Keeping a credit card open that costs you more than $100 each year just to keep from hurting your credit is simply not worth it.

The value of annual-fee cards
There are several credit cards on the market that charge an annual fee. There also are several no annual fee cards that offer rewards.

With rewards cards that charge an annual or monthly fee, you have to weigh whether you are getting more rewards than what you are paying in fees to use that card. Since you have not been using your card, you are paying for a card and not getting its benefits.

Impact on length of credit history
Closing the account will likely cause a small drop in your credit score for a few reasons.

You say the card has not had a balance in quite some time, which leads me to believe that you have had the card for several years. One factor in credit scoring is the age of your accounts. Having older accounts signals that you have been responsible in the past with this credit and likely would be responsible with additional credit. 

Credit scoring models look for the “oldest credit line” in scoring. If you have other older accounts, closing this credit card will likely not cause much, if any, drop to your score in this area.

However, if it is your oldest account by far, that could affect hurt your score a bit more. If that is the case, consider calling your card issuer to request the account be “downgraded” to a no-fee card. This would help preserve your length of credit history without having to pay an annual or monthly fee for a credit card.

Impact on credit utilization
Another factor in scoring that could be affected if you close this card is credit utilization – the amount you have borrowed compared to your credit limits.

Since the account has a $0 balance and has been that way for quite some time, your credit utilization rate on this card is zero.

Credit utilization applies to each individual card on your credit report as well as the overall level of debt. If you keep other cards with an equally low utilization ratio, closing this card might have virtually little to no effect on your score.

However, if you keep a high balance on any other or most of the cards you have, this account is helping you lower your overall credit utilization ratio. Closing this card could cause your credit utilization to increase, and your score to drop. (Credit utilization is the second most important scoring factor, after making on-time payments.) 

Impact on available credit
The last reason closing the account might hurt you in the short term is the available credit on this card.

While the FICO score – the one used for most lenders in the U.S. – doesn’t take available credit into consideration, the other credit score in the market, VantageScore, does. The good news is that available credit is the least influential of all six VantageScore scoring factors.

Plenty of available credit also shows that you are a responsible user. If you close this account, you will lose the additional available credit.

Any drop in your score due to that, however, will probably be minimal, and could be overcome with a few months of responsible financial behavior. 

Unless you are planning a major purchase in the very near future that would require you to seek financing, I see no reason why you should not close this account today.

Start putting that $8.41 in savings and by this time next year, you will have more than $100 that you wouldn’t have had otherwise. Or close this card and apply for any one of the several no annual fee rewards cards that are available.

Take care of your credit!

See related: When to close an annual-fee card, Card account isn't closed if annual fee still charged

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Updated: 11-24-2017