Will My Credit Score Go Down if I Close an Account?
Explore the nuanced impact of closing a credit account on your credit score. Get insights into key factors and what to assess beforehand.
A credit score serves as a numerical representation of an individual’s creditworthiness, influencing various financial opportunities. This number provides lenders with a quick assessment of a borrower’s likelihood to repay funds responsibly. Many individuals wonder about the potential impact of closing an account on this score. Understanding the factors that comprise a credit score clarifies how such an action might lead to changes.
Understanding Credit Score Components
Credit scores are built upon several components, each weighted differently in common scoring models like FICO and VantageScore. Payment history is the most significant factor, accounting for 35% of a FICO Score. This component reflects whether past credit accounts have been paid on time and consistently.
Amounts owed, also known as credit utilization, constitutes about 30% of the FICO Score. This measures the proportion of available revolving credit currently being used. Keeping this ratio low, generally below 30%, is often seen as favorable. A longer credit history contributes around 15% to the score, considering the age of the oldest account, newest account, and the average age of all accounts.
New credit, representing recent applications and newly opened accounts, makes up about 10% of the score. Frequent applications for new credit within a short timeframe can signal increased risk to lenders. Finally, the credit mix, or the diversity of account types like credit cards and installment loans, accounts for the remaining 10%. While not the most heavily weighted, demonstrating the ability to manage different credit types can be beneficial.
How Closing Accounts Affects Credit Factors
Closing an account can influence a credit score by impacting several underlying factors. A primary concern is the effect on credit utilization, especially when closing a credit card. If a credit card is closed, its credit limit is removed from the total available credit, which can immediately increase the credit utilization ratio if balances exist on other revolving accounts. For instance, closing a card with a $5,000 limit when you have $1,000 owed on another card means your total available credit decreases, making your existing debt appear as a larger proportion of your total credit.
The length of credit history can also be affected, particularly if the closed account is one of the oldest. While a closed account with a positive payment history remains on a credit report for up to 10 years, closing it means it no longer contributes to the average age of open accounts. This can reduce the overall average age of accounts, potentially lowering the score, especially for individuals with a relatively short credit history.
Regarding credit mix, closing an account might alter the diversity of credit types. While credit mix is a smaller factor, maintaining a variety of credit accounts can be seen favorably by lenders. However, opening new accounts solely to diversify credit is generally not advised, as new credit inquiries and new accounts can temporarily lower a score. Closing an account does not erase its payment history from the credit report, which remains for a set period. Yet, closing an account stops the accumulation of further positive payment history from that specific account, which is a significant factor in credit scoring.
Assessing Your Accounts Before Closure
Before deciding to close a credit account, a thorough assessment of its characteristics and your overall credit profile is advisable. Begin by reviewing your credit report to identify the credit limit of the account. Understanding how much credit this account contributes to your total available credit is important, especially for revolving accounts like credit cards.
Next, determine the age of that specific account, noting if it is one of your oldest credit lines. Accounts with a long history of responsible use are valuable for maintaining a strong length of credit history. Additionally, evaluate any outstanding balances on the account you consider closing, as well as on all other credit accounts. This helps project the impact on your credit utilization ratio if the account’s credit limit is removed.
Consider how the account contributes to your overall credit mix. If it represents a unique type of credit within your profile, its closure could reduce diversity. This analysis, based on information readily available in your credit report, allows for an informed decision about impacts on your credit score.