If you close you a credit card account, your credit score should increase, right? After all, you’ll no longer be able to rack up debt on a closed account. One less method of getting into debt should count for something, right?
Unfortunately, it’s not that simple. Your credit score appears to be a simple number. But underneath its simple exterior lies a fairly complex set of factors that determine whether your score increases, decreases, or remains the same when something changes within your credit profile.
In fact, there are multiple factors that contribute to your credit score. And each of those factors is weighted differently. Change one element and your score can change. Sometimes a little. Sometimes a lot. And closing a credit card can affect multiple elements of your credit score.
Image source: Experian – 11 Credit Myths.
Understanding Your Credit Score
The exact algorithms used to determine credit scores are proprietary, but the credit scoring companies do give us a breakdown of the factors used when calculating credit scores*.
Here is how FICO calculates credit scores:
- 35% Payment History
- 30% Amounts Owed
- 15% Length of Credit History
- 10% New Credit
- 10% Types of Credit in Use
The above information comes from the MyFico website. However, the exact breakdown may vary slightly for some individuals based on the length of their credit score and other factors (for example, credit bureaus may weigh factors differently if the individual doesn’t have a long history).
*Note: The VantageScore is another popular credit score. It has a different model, but incorporates many of the same factors used by FICO.
What Will Closing a Credit Card do to Your Credit Score?
Using the above information, we can get a better idea of how closing a credit card will affect your score. On the surface, it’s impossible for me or anyone else to tell you that closing a credit card will increase your score by 10 points, or decrease your score by 15 points, or give you any other exact number. There are too many moving parts to do that. But we can look at the credit score breakdown above and understand how closing a credit card will affect your score.
Let’s see how closing a credit card affects each of the above categories:
Payment History (35%). No impact. Your payment history doesn’t change by closing a card. By definition, it is history, and will not change. Even if you close a credit card on which you missed payments, those missed payments are still part of your history. Closing the credit card just ensures you won’t miss future payments – unless, of course, you still have a balance when you close your account. If that is the case, you would still be obligated to continue making those payments on time.
Amounts Owed (30%). Potential impact. Again, if you owe a balance when you close the account, you would still owe that balance until it is paid off. If your card was paid off when you close the account, there is no change in amount owed. So where does the potential impact come into play? Your credit utilization.
Credit utilization is an often-missed factor when looking at credit scores. Your credit utilization is the percentage of your potential credit you are using. For example, if the only credit you have available to you is a credit card with a $5,000 limit and a $4,000 balance, you are utilizing 80% of your credit. Using 80% of your credit is fairly high.
This is an over-simplified example, as many credit card holders may have multiple lines of credit to consider, including multiple credit cards, a mortgage, a car loan, student loans, etc.
Closing a credit card can impact your credit utilization by decreasing the amount of available credit. If you don’t also decrease the amount of money you owe, then your credit utilization increases, which can have a negative impact on your credit score. For example, let’s say you have a credit card with a $10,000 limit, and zero balance. Your other lines of credit total $40,000 (for $50,000 total available credit), and you have $30,000 of that tied up in loans. Your credit utilization would be 60% ($30,000 out of $50,000). If you close your credit card with the $10,000 available credit, but don’t change the amount you owe, you would now be utilizing $30,000 out of $40,000 available credit, or 75%. That is a substantial increase and may have a negative impact on your credit score.
Length of Credit History (15%). Potential Impact. Credit scores consider your entire credit history. For example, if you close a credit card you had open for 10 years, and your other credit accounts were all recent, you may see a drop in the average length of credit history. These long-held accounts are known as “aged accounts” and losing one could potentially hurt your credit score. On the other hand, if all your other accounts are fairly old and you close a new account, you could improve your average age of credit and your score (for this section) might improve slightly.
New Credit (10%). Potential Impact. Closing a credit card shouldn’t have a direct impact on new credit. But you may see a change in this area if you closed this credit card because you were shopping for a new credit card, or hoping to open a new line of credit. The New Credit section of your score is based on how many new lines of credit you have recently opened, as well as your recent credit inquiries. Closing a credit card likely wouldn’t have a large impact to this portion of your credit score.
Types of Credit in Use (10%). Potential Impact. The type of credit you are using can have a positive or negative impact on your credit score.
Which do you think represents a more trustworthy borrower?
- Person A: Someone who has a mortgage, a small amount of student loans, and a personal credit card with a very small balance, or
- Person B: Someone who has two payday loans, a retail credit card with a high balance, and a high interest car loan
On paper, the first individual looks like they would be more likely to be able to pay their bills on time. The credit scoring models look at this type of information when calculating your score. In most cases, a credit card from a major bank is better than a retail credit card, and it is certainly better than having subprime loans, payday loans, title loans, and similar open lines of credit.
Closing a credit card may impact this section of your credit score, depending on the other type of credit card you close and the other types of active lines of credit in your profile. This section is highly dependent upon all the types of credit accounts you have to your name.
Verdict – Will Closing a Credit Card Affect Your Credit Score?
Again, there are many factors to consider, so I won’t tell you yes or no. But I will give you some tips to minimize any impact closing a credit card may have.
Don’t close old credit cards. Your total age of credit history is important and closing an old credit card can bring down your average age of credit, which can hurt your score. Keep the card open unless it has a high annual fee, a high interest rate, or there is a compelling reason to close the account. Even then, you may wish to downgrade the card to a version that doesn’t charge an annual fee, or transfer your balance to another credit card with a lower interest rate.
You may also consider putting a small recurring expense on the card, then setting up an auto-pay from your bank – that way you still use the card enough to keep it open and you will never miss a payment.
Consider moving the credit line to another card. My wife had two Discover cards and we decided to close one card. We kept the oldest card open and moved the available credit from the other card. This kept her credit utilization the same, but increased her average age of credit.
Request a limit increase on another credit card. You can maintain your credit utilization by increasing the limit on a second credit card before you close the first card. Doing so may reduce the chances your credit score drops due to the credit utilization increasing.
Just roll with it. Closing a credit card may have a small impact on your credit score. But don’t let a potential change to your credit score convince you to keep a credit card you don’t want or need. In most cases, any change to your credit score will be temporary. And with good financial practices, you can improve your credit score. Most importantly, you shouldn’t keep an account open if it isn’t the right move for your overall financial situation.
This blog post was written as part of a sponsored program for ConsumerInfo.com, Inc., an Experian Company. All views expressed are entirely my own and were not influenced or directed by Experian. This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.