Will My Credit Go Down If I Close a Credit Card?
Understand how closing a credit card affects your credit score and what factors to consider for your financial health.
A credit score is a numerical representation of an individual’s creditworthiness, typically ranging from 300 to 850. Lenders use this score to assess the risk of lending money, influencing decisions on loan approvals, interest rates, and credit limits. A higher score generally indicates a lower risk, potentially leading to more favorable borrowing terms. Understanding how various financial actions, such as closing a credit card, can affect this score is important for managing one’s financial health effectively.
How Closing a Credit Card Affects Credit Score Factors
Closing a credit card can influence several key components that determine a credit score, primarily affecting credit utilization, the average age of accounts, and potentially the credit mix.
Credit utilization, representing the amount of credit used relative to the total available credit, is a significant factor, accounting for approximately 30% of a FICO Score and 20% of a VantageScore. When a credit card account is closed, its credit limit is removed from the total available credit. If balances remain on other open cards, this reduction in overall available credit can cause the utilization ratio to increase, which may negatively impact the credit score.
The average age of accounts is another factor, making up about 15% of a FICO Score and influential in VantageScores. This factor considers the age of all credit accounts. Closing an older credit card can shorten the overall average age of accounts, particularly if it was one of the oldest. Closed accounts in good standing may remain on a credit report for up to 10 years, but closing an old account can still decrease the average age.
Credit mix, which assesses the diversity of credit accounts an individual manages (e.g., credit cards, installment loans), typically accounts for around 10% of a FICO Score. While less influential than payment history or credit utilization, demonstrating the ability to manage different types of credit responsibly is seen favorably by scoring models. Closing a credit card, especially if it is the only revolving credit account, could narrow the credit mix, although its impact on the score is generally minor compared to other factors.
Variables Influencing the Impact of Closing a Card
The extent to which closing a credit card affects a credit score is not uniform; it depends on several individual circumstances.
The age of the specific account being closed plays a significant role. Closing a relatively new card with a short history will likely have less impact than closing an old, established account. Maintaining older accounts, even if unused, is generally beneficial for credit history.
The number of other open credit accounts a person has also influences the impact. If an individual has numerous other credit cards with substantial available credit, closing one card may not significantly alter their overall credit utilization ratio. Conversely, if there are only a few credit accounts, closing one could disproportionally reduce available credit and increase utilization. The overall credit limit across all remaining cards is another important variable; a high remaining total limit can absorb the loss of available credit from a closed card more effectively.
Whether the card has an outstanding balance when closed is an important consideration. Closing a card with an existing balance means the available credit on that specific card drops to zero, which can significantly increase the credit utilization ratio for that card and potentially overall. While it is possible to close a card with a balance, it still needs to be paid off, and interest will continue to accrue. FICO scores incorporate balances on closed accounts when calculating utilization, whereas VantageScores may not.
Key Considerations Before Closing a Credit Card
Before deciding to close a credit card, it is prudent to evaluate one’s current credit standing and financial situation.
Review your current credit report from each of the three major credit bureaus—Equifax, Experian, and TransUnion—which can be accessed annually for free at AnnualCreditReport.com. This helps you understand all open accounts, their limits, and overall credit history. Identify and dispute any errors.
Assessing the overall credit utilization across all accounts is another important consideration. Calculate the total of all current credit card balances and divide it by the total of all credit limits to determine the current utilization percentage. If closing a specific card would cause this ratio to rise significantly above the recommended 30% threshold, it may be advisable to reconsider or pay down balances on other cards first.
Consider the age of the account you plan to close. If it is one of your oldest accounts, closing it could impact the average age of accounts, potentially lowering your credit score. Weigh the benefits of closing the card, such as avoiding annual fees, against the potential negative impact on credit history length.