Credit and Debt Blog

(Ryan from Pennsylvania) Does it hurt my credit score if I close a credit card account?

Dear Ryan:

Closing a credit card does not by itself hurt your credit score. There are some related inputs in the credit scoring formula that could potentially cause a drop in your scores. These are examples of possible negative consequences to closing a credit card account:

Still Carrying Credit Card Balances

If you still owe credit card debt, then closing one of your accounts will absolutely lower your credit scores. The problem is magnified if you lose charging privileges prior to paying off the balance.

First consider that approximately 30% of the most widely used credit scoring formulas calculate how much debt you owe. They compare this debt with the credit limit on each account. This credit utilization ratio determines how much of your available credit you are actually using. An ideal credit utilization ratio is at most 10%, meaning that if you have a total credit limit of $4,000, then you never allow your balance to exceed $400. Understand that credit utilization ratio is measured on each individual account as well as on an average basis across all of your accounts.

If you pay off an account and close it, then your overall credit utilization ratio would increase if you still owe other credit card debt balances. Therefore, it is generally recommended to avoid closing credit card accounts until you have repaid all of your credit card debt.

Limited Account Duration

Another 15% of credit scoring formulas relates to duration of your accounts. In plain English, this means that the longer that you are a good customer, the better your credit score. Individuals with the highest credit scores normally have accounts that they have maintained well over 10 years.

Closing a credit card account does not lower your average account age. The account will remain on your credit profile for 10 years after your last payment (or 7 years if it was a derogatory record). Of course an account that you keep open for only 3 years will still only show a 3 year duration 5 years from now. If it was still open, then the age would then be 8 years, thereby increasing your duration.

How to Select Accounts for Closure

If you have several unused credit card accounts, then you may safely close some of them if you do not owe any credit card debt. For credit scoring purposes, you would generally want to select accounts that have been open for the least amount of time. Hold onto your dinosaurs, since they are better credit builders than newer accounts.

Secondly, you can easily close store card accounts without worrying about losing points. Your major credit cards would be bigger credit builders and would therefore be better cards to hang on to.

Third, accounts with puny credit limits may be selected for closure. Simply using a credit card that has a very low credit limit could potentially lower your scores for that month.

Of course, all of the above tips focus only on credit scoring. There are other factors to consider also, such as costs and benefits. Cards that have annual fees, high interest rates and consumer-unfriendly fees (fee harvester cards) are the least beneficial cards to maintain. Alternately, you may want to keep a credit card that provides useful rewards, such as airline miles or cash rebates.

Remember that each credit card account that you keep open is a potential risk. You could forget to make a payment on a card that has an annual fee when you made no purchases that month. You could lose a card that you do not regularly use, making it a target for credit card fraud. Finally, carrying around an inch-thick of plastic could be bad for your health (George Costanza wallet)!