Will closing a new credit card increase my credit age?

The Double-Edged Sword: Why Closing a New Credit Card Could Hurt Your Credit Score

Opening a new credit card can be exciting. It offers opportunities for rewards, building credit, and managing finances more efficiently. However, sometimes circumstances change, and you might consider closing that shiny new piece of plastic. Before you reach for the scissors (figuratively, of course), it’s crucial to understand the potential impact on your credit score. Contrary to what you might think, closing a recently opened credit card can actually hurt your credit, for reasons beyond just the missed opportunity for rewards.

The problem stems from two key factors that credit scoring models, like FICO and VantageScore, heavily weigh: average account age and credit utilization ratio. Closing a new card can negatively impact both.

1. The Age Game: Reducing Your Average Account Age

Your credit history is like a living, breathing financial record. The older and more consistently positive that record is, the more trustworthy you appear to lenders. A significant portion of your credit score is determined by the age of your credit accounts. This isn’t just about the age of your oldest account; it’s about the average age of all your open accounts.

Closing a new credit card, even one that’s only been open for a few months, drags down that average. Imagine you have a credit card you’ve had for 10 years and a new one you opened six months ago. Your average account age is around 5 years. Closing the six-month-old card drastically reduces that average, making your overall credit history appear less established. This can signal higher risk to potential lenders.

2. The Utilization Tango: Increasing Your Credit Utilization Ratio

Your credit utilization ratio (CUR) is the amount of credit you’re using compared to your total available credit. It’s calculated by dividing your outstanding balance across all credit cards by your total credit limit. Experts generally recommend keeping your CUR below 30%, and ideally below 10%, for optimal credit scores.

Closing a new credit card can dramatically increase your CUR. Let’s say you have two credit cards. Card A has a limit of $5,000, and Card B (the new one) has a limit of $1,000. You have a balance of $1,000 on Card A. Before closing Card B, your CUR is approximately 16.7% ($1,000 / $6,000).

However, close Card B, and suddenly your total available credit drops to $5,000. Now, your CUR jumps to 20% ($1,000 / $5,000). While this example doesn’t represent a catastrophic increase, it illustrates the principle. If you were closer to that 30% threshold already, closing the card could push you over the limit, negatively impacting your score.

When Might Closing a New Card Be Justifiable?

While closing a new credit card is generally discouraged, there are a few situations where it might be the lesser of two evils:

• The card charges excessive fees: If the card has a high annual fee that you can’t justify based on the rewards or benefits, it might be worth closing, even with the credit score implications.
• You’re struggling to control your spending: If the availability of credit is leading to uncontrolled spending and debt accumulation, closing the card, while temporarily impacting your score, might be necessary for your overall financial health.
• The card is fraudulent or compromised: In cases of suspected fraud or unauthorized activity, closing the card is crucial for security reasons.

Alternatives to Closing:

Before closing a new credit card, consider these alternatives:

• Request a credit limit increase on another card: This can improve your overall credit utilization ratio without sacrificing your average account age.
• Consider a balance transfer: Transfer the balance from a high-interest card to a lower-interest card.
• Store the card away: If you’re tempted to overspend, simply put the card in a safe place and avoid using it.

The Bottom Line:

Closing a new credit card can have unintended consequences for your credit score, primarily by reducing your average account age and increasing your credit utilization ratio. Weigh the potential negative impact against the reasons for wanting to close the card, and explore alternative options before making a final decision. Remember, a healthy credit score is built on a foundation of responsible credit management, and sometimes, that means keeping accounts open, even if they’re relatively new.