Does Your Credit Score Decrease When You Close an Account?

A credit score is a numerical representation of an individual’s creditworthiness, typically a three-digit number ranging from 300 to 850. It helps lenders assess the likelihood a borrower will repay financial obligations. A strong score can lead to favorable interest rates, better credit card terms, and influence rental or insurance premiums. Understanding how actions like closing an account affect this score is a common concern.

Understanding Credit Score Components

Credit scores are calculated using various pieces of data found in an individual’s credit report. While different scoring models exist, such as FICO and VantageScore, they generally consider similar categories. Payment history is typically the most significant factor, demonstrating whether past credit accounts have been paid on time, often accounting for 35% to 40% of a score. This factor includes details on on-time payments, as well as any late payments or collection accounts.

The amounts owed, particularly the credit utilization ratio, represent another substantial portion, usually around 30% of a FICO Score. This ratio reflects how much credit is used compared to the total available credit. The length of credit history, which includes the age of the oldest account and the average age of all accounts, generally contributes about 15% to the score. New credit, which considers recent credit applications and newly opened accounts, and credit mix, reflecting the diversity of credit types like credit cards and installment loans, each typically account for about 10%.

How Closing Accounts Affects Credit Utilization

Closing a credit account can directly impact the credit utilization ratio. This ratio is calculated by dividing total outstanding balances on revolving accounts by total available credit across those accounts. For instance, if someone has $2,000 in balances on cards with a combined limit of $10,000, their utilization is 20%. If one of those cards with a $5,000 limit is closed, total available credit drops to $5,000, but the $2,000 balance remains.

Consequently, the credit utilization ratio would jump to 40% ($2,000 / $5,000). A higher utilization ratio indicates greater reliance on available credit, which can negatively affect a credit score. Lenders generally prefer to see utilization below 30%, and many individuals with excellent scores maintain single-digit utilization. Closing an account can increase this ratio, potentially causing a score decline.

How Closing Accounts Affects Credit History Length

Closing a credit account can also influence the length of one’s credit history. Credit scoring models consider the age of the oldest account, the age of the newest account, and the average age of all accounts. A longer credit history generally benefits a credit score, as it demonstrates a consistent ability to manage credit over time.

Even when an account is closed, it does not immediately disappear from a credit report. Accounts closed in good standing, with a history of on-time payments, can remain on a credit report for up to 10 years. If an account had negative information, such as late payments, it may remain on the report for up to seven years. While closed accounts contribute to credit history for a period, closing an older account can eventually shorten the average age of accounts once it falls off the report. This long-term effect can impact the credit score, particularly if the closed account was significantly older than other active accounts.

Other Factors to Consider When Closing Accounts

Beyond credit utilization and history length, several other considerations are relevant when deciding whether to close an account. The diversity of credit types, known as credit mix, is a minor factor in credit score calculations. While having a mix of revolving accounts (like credit cards) and installment loans (like mortgages or auto loans) can be beneficial, it is not necessary to have every type of credit, and closing an account may only have a small impact.

The sheer number of open accounts is another general consideration, but it is not a primary driver compared to utilization or payment history. Furthermore, the status of the account at the time of closure is important. Closing an active, regularly used account can have a different impact than closing a dormant or unused one, especially if the dormant account had a high credit limit contributing to a favorable utilization ratio. Before closing any account, evaluate its age, credit limit, and how its closure might affect your overall credit profile, including the ability to manage existing balances across remaining accounts.