Closing Unused Accounts: The Right Way to Do It

Clearing out financial clutter by closing unused store cards or credit cards can feel like a smart move. However, if not done thoughtfully, it can have an unintended negative impact on your credit score. Here’s how to approach it the right way.

Why Closing an Account Can Hurt Your Score

Closing an account can affect your credit score in two main ways:

1. It Increases Your Credit Utilization Ratio: Your credit utilization is the amount of debt you have compared to your total credit limit. An unused card with a zero balance still contributes its limit to your total available credit. When you close it, your total limit decreases. If you have balances on other cards, your overall utilization percentage will instantly go up, which can lower your score.

   • Example: You have two cards, each with a R10,000 limit (Total limit: R20,000). You owe R5,000 on Card A and R0 on Card B. Your utilization is 25% (R5,000 / R20,000). If you close Card B, your total limit drops to R10,000, and your utilization shoots up to 50% (R5,000 / R10,000), which is a red flag.

2. It Can Reduce the Average Age of Your Accounts: The length of your credit history is a factor in your score. An older average account age is generally better. If you close one of your oldest accounts, the average age of your accounts will decrease, which can also cause a small drop in your score.

When Should You Close an Account?

Despite the potential downsides, there are good reasons to close an account:

• High Annual Fees: If an unused card has a high annual fee, the cost likely outweighs the benefit of keeping it open.
• Temptation to Spend: If an open line of credit is a temptation you struggle with, closing it can be a wise move for your financial discipline.
• Poor Customer Service or Terms: If you’re unhappy with the provider, it’s perfectly reasonable to close the account.
• Account Security: If a card has been compromised, you may want to close the account permanently after resolving the fraud.

The Correct Way to Close an Account

If you decide to proceed, follow these steps:

1. Pay Off the Balance: You must ensure the account has a zero balance. You cannot close an account that still has debt on it.

2. Contact the Credit Provider Directly: Don’t just cut up the card. You need to formally contact the bank or retailer and explicitly request to close the account. Do this via a phone call and follow up with a written request (email is fine) to create a paper trail.

3. Get a Closure Confirmation Letter: Once the provider has processed your request, ask them for a formal account closure letter. This is your proof that the account has been officially closed and has a zero balance. This is crucial if you need to dispute any errors later.

4. Monitor Your Credit Report: After a month or two, check your credit report to ensure the account is listed as “Closed” by you. If it’s still showing as open, contact the provider again and, if necessary, log a dispute with the credit bureaus, using your closure letter as evidence.

General Rule: It's usually best to keep your oldest credit accounts open, even if you don't use them. If you need to close an account, choose one of your newer ones with no annual fee. By being strategic, you can maintain your financial hygiene without inadvertently harming your credit score.