Is Closing an Account Bad for Credit?

Many people wonder if closing a credit account will negatively impact their credit score. The actual effect depends on several factors, including the account type and an individual’s overall credit profile. Understanding these nuances is important for anyone considering closing an account, as it can influence future financial opportunities.

Credit Score Components and Account Closure

Credit scores, such as FICO and VantageScore, assess an individual’s creditworthiness and are influenced by several components. Payment history is the most significant factor, typically accounting for about 35% of a FICO Score. Amounts owed, or credit utilization, makes up around 30% of the score, measuring the proportion of available credit being used.

The length of credit history contributes approximately 15%, considering the age of all accounts. Credit mix, representing the diversity of account types, accounts for about 10%. New credit, indicating recent applications, makes up the remaining 10%. Closing an account can influence these components by reducing available credit, shortening the average age of accounts, or altering the credit mix.

Impact on Revolving Credit Accounts

Closing a revolving credit account, like a credit card, can significantly impact a credit score through its effect on credit utilization and the average age of accounts. Credit utilization is calculated by dividing total outstanding balances by total available credit. For example, if you have $2,000 in balances on cards with a combined limit of $10,000, your utilization is 20%. Lenders prefer this ratio to be below 30%.

When a credit card is closed, its credit limit is removed from total available credit. If balances are carried on other cards, this reduction can increase credit utilization, even if the amount owed remains the same. For instance, if a $3,000 card is closed from a $10,000 total limit, available credit drops to $7,000. With a $2,000 balance, utilization rises to 29%, which can lead to a temporary score drop.

Closing an old credit card can shorten the average age of credit history. Credit scoring models consider the age of all accounts. An older, well-maintained account demonstrates responsible credit management, viewed favorably by lenders. Even if a closed account remains on the credit report for up to 10 years, its closure can negatively impact the average age of active accounts, especially if it was one of the oldest.

Impact on Installment Loan Accounts

The impact of closing an installment loan, such as a mortgage or auto loan, differs from revolving credit. Installment loans are typically “closed” when paid in full. Paying off an installment loan generally does not affect credit utilization like closing a credit card, as these loans have a fixed balance. The positive payment history established during the loan’s term continues to benefit the credit score even after closure.

Paying off an installment loan can subtly influence the credit mix component. Credit mix reflects the diversity of credit accounts, including both revolving and installment types. While a smaller factor (around 10% of a FICO Score), losing an installment loan if it was the only one of its type could slightly alter this mix, potentially leading to a minor, temporary score dip. The overall benefit of eliminating debt often outweighs this minor impact.

Factors to Consider Before Closing an Account

Before closing a credit account, consider several factors to minimize potential negative impacts on your credit score. The age of the account is a primary concern; closing an older account, especially your oldest, can lower the average age of your credit history. This is particularly impactful for individuals with a short overall credit history. Keeping old accounts open, even if rarely used, helps maintain a longer credit age.

Consider the account’s credit limit, especially for revolving accounts. Closing a card with a high limit while carrying balances on other cards will reduce total available credit and could significantly increase your credit utilization. To mitigate this, pay down balances on other revolving accounts before closing a card. If you have multiple credit cards, closing one with a lower limit or one that is newer may have less effect on your credit profile.

Evaluate your current credit utilization across all revolving accounts. If utilization is already high, closing an account could push it higher, potentially decreasing your score. Also, consider your overall credit profile and other active accounts. If the account you are considering closing is one of only a few credit sources, closing it could result in a “thin” credit file, making it harder for lenders to assess your creditworthiness.