Does Your Credit Go Down When You Close a Credit Card?

Many individuals wonder about the consequences of closing a credit card, particularly how it might affect their credit score. This concern is understandable, as credit scores are complex and influenced by a variety of factors. Understanding these components is important for anyone managing their financial health. This article clarifies the implications of closing a credit card and provides insights into relevant credit scoring elements.

The Immediate Impact

Closing a credit card does not typically lead to an immediate drop in a credit score. Instead, any impact is usually indirect and develops over time, influencing underlying credit score factors. Credit scoring models, such as FICO and VantageScore, consider several elements from a credit report to determine creditworthiness.

The primary ways closing an account can affect a score relate to changes in the total amount of available credit and the average age of credit accounts. While a closed account remains on a credit report for an extended period, its influence on these factors can shift. For example, an account closed in good standing, meaning balances were paid as agreed, can stay on a credit report for up to 10 years and continue to be included in score calculations. Conversely, accounts with negative information, such as late payments, may remain for about seven years.

Credit Utilization’s Role

Credit utilization is a significant factor, representing the amount of revolving credit used compared to the total available revolving credit. It is calculated by dividing total balances owed on credit cards by total credit limits across all revolving accounts, expressed as a percentage. For instance, if an individual has $2,000 in balances across cards with a combined limit of $10,000, their utilization is 20%. Credit scoring models assign substantial weight to this factor; “amounts owed” or credit utilization can account for approximately 30% of a FICO Score.

Closing a credit card can significantly impact this ratio by reducing the total available credit. If an individual closes a card with a high credit limit, their overall available credit decreases, while their outstanding debt remains the same. This can cause the credit utilization ratio to increase, even without taking on new debt.

For example, if someone has two cards with $5,000 limits each, carrying a $2,000 balance on one card, their total available credit is $10,000 and utilization is 20%. If they close the unused card, their available credit drops to $5,000, and the same $2,000 balance now results in a 40% utilization. A higher utilization ratio is generally viewed negatively by credit scoring models, as it suggests a higher reliance on credit and potentially a greater risk of default. Financial professionals commonly recommend keeping the overall credit utilization ratio at or below 30% to maintain a healthy credit score.

The Length of Credit History

The length of credit history is another important element considered by credit scoring models. This factor assesses how long credit accounts have been established, including the age of the oldest account, the age of the newest account, and the average age of all accounts. A longer credit history generally signals to lenders that an individual has more experience managing credit responsibly, which can positively influence a credit score. For instance, the length of credit history can account for about 15% of a FICO Score and around 20% to 21% of a VantageScore.

Closing an old credit card can potentially reduce the average age of accounts, particularly if it was one of the oldest accounts on the credit report. While closed accounts may remain on a credit report for several years, their influence on the average age of accounts may diminish over time.

For example, FICO models continue to include closed accounts in their credit history calculations, meaning the time an account was open still contributes to the overall credit age even after closure. However, VantageScore models may exclude some closed accounts, which could lower the average credit age. Consequently, closing an older account can have a greater impact on individuals with shorter overall credit histories, as it disproportionately affects their average account age.

Other Factors Influencing Your Score

Beyond credit utilization and the length of credit history, other factors contribute to an individual’s credit score, though they are less directly impacted by closing a credit card. Payment history is often the most influential factor, accounting for approximately 35% of a FICO Score and a significant portion of a VantageScore. Closing a card does not erase past payment history associated with that account; positive payment records remain on the credit report and continue to benefit the score.

Credit mix is another component, assessing the diversity of credit types an individual manages, such as revolving accounts and installment loans. This factor accounts for around 10% of a FICO Score. While closing a credit card might slightly alter the credit mix, its impact is generally less significant compared to credit utilization or history length. Lenders appreciate seeing a responsible management of various credit types.

New credit, which includes recent applications and newly opened accounts, also plays a role in credit scoring. This category accounts for about 10% of a FICO Score. Closing an existing credit card is distinct from opening new credit and does not directly trigger the temporary score dip associated with hard inquiries from new applications. However, if closing a card prompts an individual to apply for a new one, the subsequent new credit inquiry could temporarily affect their score.