Does Closing an Account Hurt Your Credit Score?

A credit score is a numerical representation of an individual’s creditworthiness, used by lenders to assess risk when extending credit. This three-digit number helps determine eligibility for loans, credit cards, or mortgages, and influences interest rates. While a higher score generally indicates lower risk and more favorable terms, closing an account can influence this score. This article explores the factors involved.

Understanding Credit Score Components

A credit score is calculated based on several factors. Payment history holds the largest influence, accounting for 35% of a credit score. This component reflects whether past credit accounts have been paid on time, indicating reliability.

Amounts owed, also known as credit utilization, makes up about 30% of the score. This refers to the proportion of available credit currently being used across all revolving accounts. A lower utilization rate, ideally below 30%, generally suggests responsible credit management and positively impacts the score.

The length of credit history contributes approximately 15% to a credit score. This factor considers how long credit accounts have been established, including the age of the oldest account and the average age of all accounts. A longer credit history signals greater stability and experience in managing credit.

Credit mix accounts for about 10% of the score, reflecting the diversity of credit types an individual manages. This includes a combination of revolving credit, such as credit cards, and installment credit, like auto loans or mortgages. Demonstrating the ability to handle various types of credit responsibly can be beneficial.

New credit, which includes recent applications, makes up the remaining 10% of the score. Opening multiple new accounts within a short period can be viewed as a higher risk by lenders. These components interact to form a comprehensive picture of an individual’s credit profile.

Impact of Closing Revolving Accounts

Closing a revolving account, such as a credit card, can significantly impact the “amounts owed” component. When a credit card is closed, its credit limit is removed from the total available credit. If balances exist on other active cards, this reduction in overall available credit can increase the credit utilization ratio, which is the percentage of total available credit being used.

For example, if an individual has $10,000 in total credit limits across several cards and carries a $2,000 balance, their utilization is 20%. If a card with a $5,000 limit is closed, total available credit drops to $5,000, and the $2,000 balance now represents 40% utilization, potentially negatively affecting the score. Maintaining a utilization ratio below 30% is recommended to avoid a negative impact.

Closing a revolving account can also affect the “length of credit history” factor. Credit scoring models consider the age of all accounts, including closed ones, but closing an older account can reduce the average age of active accounts over time. An account in good standing typically remains on a credit report for up to 10 years after closure, contributing to credit history during that period.

If the closed card was the oldest account, its removal can shorten the credit history, particularly if many other accounts are newer. This is more pronounced for individuals with shorter overall credit histories. Individuals should carefully consider the age of a revolving account before closing it, especially if it represents a significant portion of their credit history.

Impact of Closing Installment Accounts

The impact of closing installment accounts, such as auto loans, mortgages, or student loans, differs from that of revolving accounts. Once an installment loan is fully paid off, the account is closed, and it no longer contributes to “amounts owed” or credit utilization in the same way as revolving credit. The balance becomes zero, and there is no longer an available credit limit to affect the utilization ratio.

Paying off an installment loan reflects positively on payment history, as it demonstrates successful repayment of debt. However, a temporary, slight dip in credit scores can occur after an installment loan is paid off and closed. This dip is often attributed to changes in the “credit mix” and “length of credit history” components.

If the paid-off loan was the only type of installment credit, its closure can reduce the diversity of credit types, affecting the credit mix. While credit mix has a smaller impact on the score (around 10%), its reduction could lead to a minor score adjustment. If the loan was an older account, its closure might slightly impact the average age of accounts, similar to revolving credit. Paid-off accounts generally remain on credit reports for up to 10 years, continuing to contribute to the history.

What to Consider Before Closing an Account

Before deciding to close any credit account, it is important to review your current credit utilization across all open accounts. Calculate your total outstanding balances and divide them by your total available credit limits to determine your current credit utilization ratio. This assessment helps understand how closing an account would specifically alter your ratio and potentially impact your score.

Identify the age of the account you are considering closing. If it is one of your oldest accounts, closing it could reduce the average age of your credit history, which is a factor in credit scoring. Consider whether you have other long-standing accounts that can maintain the overall average age of your credit profile.

Assess your overall credit mix to determine if closing the account would significantly reduce the diversity of your credit types. If the account represents a unique type of credit in your profile, such as your only installment loan, consider its role in your credit mix. Understanding your financial goals and future borrowing needs, such as applying for a mortgage or auto loan in the near term, should also inform your decision.