What Happens to Your Credit Score When You Close a Credit Card?

Closing a credit card can impact an individual’s credit score. Credit scores are dynamic financial indicators that influence various aspects of personal finance. Understanding how closing a credit card affects these scores requires grasping the underlying mechanisms used by credit scoring models. This article explains the factors that contribute to a credit score and how closing a credit card influences these elements.

Understanding Credit Score Factors

Credit scores are numerical representations of an individual’s creditworthiness, calculated by various scoring models, such as FICO and VantageScore. These models assess several categories of financial behavior to determine a score.

Payment history is a primary factor, reflecting whether past debts have been paid on time. This category often carries the most weight in credit score calculations. Credit utilization, the amount of credit used compared to total available credit, is another significant component. Keeping this ratio low indicates responsible credit management.

The length of credit history considers how long accounts have been open and the average age of all accounts. A longer history suggests more experience managing credit. The types of credit used, or credit mix, evaluates the diversity of credit products, such as revolving accounts and installment loans. New credit inquiries and recently opened accounts account for a smaller portion of the score. Each of these factors contributes to the overall assessment.

Credit Utilization Impact

Closing a credit card can immediately affect an individual’s credit utilization ratio, which is a significant component of credit scores. This ratio is calculated by dividing the total outstanding balances across all credit accounts by the total available credit limit. When a credit card is closed, its credit limit is removed from the total available credit, even if no balance was carried on that specific card.

For example, if an individual has $10,000 in available credit across multiple cards and closes a card with a $5,000 limit, their total available credit drops to $5,000. If they maintain existing balances of $1,000, their utilization ratio would increase from 10% ($1,000/$10,000) to 20% ($1,000/$5,000). A higher utilization ratio is viewed unfavorably by credit scoring models. Lenders often interpret a high utilization as an increased risk, potentially leading to a decrease in the credit score.

Maintaining a low credit utilization ratio, below 30%, is widely recommended for a healthy credit score. An increase in this ratio due to closing an account can therefore negatively impact the score. This effect is particularly pronounced if the closed card had a substantial credit limit or if the individual carries high balances on their remaining open accounts.

Length of Credit History Impact

The length of an individual’s credit history is another important factor in credit scoring models. This factor considers two main aspects: the age of the oldest account and the average age of all open credit accounts. Closing a credit card, especially an older one, can directly influence these metrics. Credit scoring models continue to include closed accounts in the calculation of credit history for a period, often up to 7 or 10 years.

However, once a closed account falls off the credit report, it no longer contributes to the average age of accounts. If the closed card was one of the oldest accounts, its eventual removal can reduce the average age of the remaining active accounts. A shorter average credit history may indicate less experience managing credit, which can be viewed less favorably by credit scoring models. For instance, closing a card opened 15 years ago when other accounts are only a few years old will have a more significant impact than closing a newer card.

The impact on the length of credit history tends to be a long-term effect, as opposed to the immediate impact on utilization. Individuals who have a relatively short credit history overall may experience a more noticeable impact if they close an account that significantly contributes to their average age of accounts.

Impact on Number of Accounts and Credit Mix

Closing a credit card also influences the total number of open credit accounts an individual maintains. While this factor carries less weight than credit utilization or payment history, it can affect a credit score. Having a reasonable number of open accounts in good standing can demonstrate an individual’s ability to manage multiple credit lines responsibly. Reducing the total number of accounts might diminish the perceived breadth of credit management experience.

Credit mix assesses the diversity of credit types an individual uses, such as revolving credit and installment loans. Closing a single credit card generally does not drastically alter a well-established and diverse credit mix. However, if a credit card is one of only a few types of credit an individual holds, or if it represents a significant portion of their revolving credit, its closure could have a more noticeable effect. For example, if an individual only has two credit cards and one installment loan, closing one of those credit cards would represent a larger change to their credit mix than for someone with many credit cards and loans.

Factors Influencing the Overall Effect

The actual impact of closing a credit card on an individual’s credit score is not uniform; it depends heavily on several personal credit factors. The severity of the effect is often mitigated if the individual possesses numerous other established credit lines. A person with a robust credit profile, including multiple long-standing accounts and low overall balances, will likely experience a less significant score reduction compared to someone with a thin credit file. Similarly, if the card being closed is relatively new, its closure will have a minimal impact on the average age of accounts.

Conversely, the impact can be more pronounced under specific circumstances. If the credit card being closed is the individual’s oldest account, or one of their few active accounts, its removal can substantially shorten their credit history and reduce their total available credit. Furthermore, if an individual carries high balances on their remaining credit cards, closing an additional card will immediately increase their credit utilization ratio, potentially leading to a more significant and immediate score drop. The overall financial health and credit habits prior to closing the account play a role in determining the outcome.