Why ID theft insurance might not be worth it

I recently called my bank to close a credit card account that I no longer use. The customer support person told me at least six times that closing a credit card account would appear on my credit report and could harm any attempt to get future credit. I would like to know if what I was told is true. It certainly sounded like this was an attempt to frighten me into keeping that account open.
— Dawn W., Washington State

The fact is, closing a credit account will never boost your credit score and may lower it. But if you have a high credit score and only close a single account — the impact on your credit score should be relatively minor.

However, you didn’t say why you want to close that account. Maybe there’s an economic downside to keeping it open, such as an annual fee or a co-signer who might run up a balance. Maybe you just want to reduce your risk of identity theft. Or maybe you believe, as many people do, that closing old accounts will boost your credit score.

In fact, the opposite is true, and closing your oldest account could actually have negative consequences because it makes your credit history appear to be shorter.

“Generally closing a lot of accounts that you don’t use anymore can hurt your credit score,” says Gerri Detweiler, the credit expert for Everyday Wealth. That’s because it changes your debt-to-available-credit ratio.

Here’s how that works. Let’s say you have $50,000 in available credit and you owe $10,000. If you close a card with a $10,000 credit limit, your available credit drops to $40,000 and your debt-to-available-credit ratio gets higher. To a potential lender, that $10,000 outstanding balance now seems a lot bigger, and giving you a loan seems to be a greater risk.

According to Fair Isaac, the company that developed credit scoring, “having available credit that you don’t use does not lower your credit score.”  Fair Isaac also points out that “any late payments associated with old accounts won’t disappear from your credit report if you close the account.” These problems will still show up on your credit report, the company says, “and may be considered in computing your credit score.”

TransUnion (one of the three big credit reporting agencies) advises consumers to keep four to six credit accounts open. “This will keep your credit and debt balances healthy,” they say. “Signs of active and responsible credit use are viewed positively by creditors.”

One more thing. If you are going to close an account, the best way to do that is to send a certified letter to the credit card issuer.

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