Does Closing a Line of Credit Hurt Your Credit Score?

A line of credit (LOC) is a flexible, revolving borrowing option, similar to a credit card, allowing access to funds up to a predetermined limit. Unlike a traditional loan, an LOC permits borrowing, repayment, and re-borrowing as needed, making it useful for various financial needs. Many individuals consider closing an LOC, but often worry about its impact on their credit score. Understanding this influence is important for informed financial management.

Key Credit Score Factors

Credit scores are numerical representations of an individual’s creditworthiness, calculated based on information in their credit reports. Several factors contribute to this score, each carrying a different weight. Understanding these components helps understand how financial decisions, including closing credit accounts, influence one’s score.

Credit utilization, which measures the amount of credit used relative to the total available credit, significantly impacts a credit score. Maintaining a low utilization ratio, below 30% of the available credit, is viewed favorably by scoring models. A lower ratio indicates responsible credit management and less reliance on borrowed funds.

The length of credit history also plays a role, reflecting how long accounts have been open and actively managed. Older accounts and a longer average age of all accounts contribute positively to a credit score. This factor demonstrates a track record of consistent credit use over time.

A credit mix, which considers the diversity of credit types an individual manages, is a minor contributing factor. This includes a combination of revolving accounts, like lines of credit and credit cards, and installment loans, such as mortgages or auto loans. Demonstrating the ability to handle different types of credit responsibly is beneficial.

Payment history, which details whether payments have been made on time, is the most influential factor in credit scoring. While closing an account does not alter past payment behavior, a consistent history of on-time payments across all accounts is important for a strong credit score.

How Closing Affects Your Credit Score

Closing a line of credit has direct implications for a credit score by altering the underlying factors that determine it. The immediate impact relates to credit utilization, as closing an account reduces the total available credit. If other credit balances remain the same, this action instantly increases the credit utilization ratio, leading to a decrease in the credit score. For example, if an individual has $10,000 in debt and $50,000 in total available credit (20% utilization), closing a $20,000 line of credit reduces available credit to $30,000, increasing utilization to approximately 33%, which negatively affects the score.

The length of credit history is also affected, particularly if the closed line of credit was an older account. While closed accounts remain on credit reports for a period, often up to 7 to 10 years, their eventual removal shortens the average age of an individual’s credit accounts. This reduction in the average age of accounts may lower the credit score, especially if it was one of the oldest accounts in the credit profile.

Closing a revolving account can also modify the credit mix. While this factor is less impactful than credit utilization or payment history, removing a type of credit has a minor influence. The actual effect on a credit score is individualized, depending on the person’s overall credit profile, including the amount of other available credit, the age of the specific line of credit being closed, and the number of other active accounts. A person with many other long-standing accounts and ample available credit may experience a minimal impact, whereas someone with a limited credit history or high existing balances may see a more noticeable decline.

Making the Decision to Close

Deciding whether to close a line of credit involves careful consideration of one’s financial circumstances and goals. Before taking action, it is important to evaluate your current credit profile, including reviewing your credit report to understand your available credit across all accounts and the age of the specific line of credit in question. This assessment helps anticipate the potential impact on your credit score.

There are alternatives to outright closing a line of credit that can mitigate negative effects on your score. Instead of closing the account, consider paying down any outstanding balance to zero and then simply not using the line of credit. Some lenders also allow you to set the credit limit to zero or put a freeze on the account, which prevents further draws without formally closing it. These approaches maintain the available credit and the length of the credit history, preserving these positive factors for your score.

However, certain situations present valid reasons for closing a line of credit, even with potential credit score implications. These reasons include high annual fees that outweigh the benefits of keeping the account open, unfavorable terms such as high variable interest rates, or a personal desire to simplify finances and reduce the temptation of accumulating debt. If the decision is made to close the account, it is important to pay off the entire outstanding balance before initiating the closure. After the account is closed, obtaining written confirmation from the lender is a good step. Regularly monitoring your credit reports in the months following the closure is also important to ensure accuracy and observe any changes in your credit score.