How Does Closing a Credit Card Affect my Credit?

 

You’ve likely heard that maxing out your credit cards can damage your credit score. While that’s certainly true, there’s another, perhaps less well known, thing you can do with your credit cards to sink your score: Close them.

Sadly, too many consumers just don’t understand why this is so. In fact, many people mistakenly believe that holding several credit cards makes them look more risky to lenders and will ding their credit scores as a result. In reality, this usually isn’t the case. While there are a few factors that affect your credit score when it comes to having credit cards, having a few open cards is not one of them.

Good Payment Standing

If you regularly make credit card payments, with full amounts and on time, your payment history actually boosts your credit score. Of course, the opposite is true as well: Paying late, or paying less than what’s owed, will damage your credit score. Unfortunately, paying off and canceling a previously late credit card account won’t miraculously erase its negative credit reporting.

In that regard, a poor payment history associated with a closed credit card will continue to affect your credit score until the closed account rolls off your credit reports — almost always seven years after closure.

Even worse than that, though, is that closing a credit card can hurt your credit score in three other ways. First, your “utilization ratio” can change. Second, the length of your credit history may shorten when the listing is later removed from your credit reports. And, third, your “credit mix,” another credit scoring factor, can be disrupted. Read on to learn more!

Utilization Ratio: Owed Debt vs. Credit Limits

This credit scoring factor has to do with how much of your available credit you’re actually using.

Let’s say you have two credit cards, each with a $1000 limit, for a total available credit of $2000 – on the first, you have a balance of $750, and on the second, you have a $250 limit. In total, you are using 50% of your available credit, or $1000 of the available $2000, so your utilization ratio is 50%.

Paying off and closing the second card would cut your available credit by half, so with the first card by itself, your utilization ratio jumps to 75% of your available credit. Since higher utilization ratios correlate with lower credit scores, this could actually hurt your ability to get a loan.

Keep in mind that consumers sporting utilization ratios of 50% or even 75% will almost always have better credit scores than others whose ratios hover around 100% because they keep their cards maxed out. Likewise, those who regularly pay down their balances to 10% or 20% of their limits are rewarded with comparatively higher scores.

Length of Credit History

This is yet another way closing a credit card can hurt your credit score. Let’s say you close a credit card you’ve had for 10 years, and your next oldest account was only acquired two years ago. Suddenly the age of your oldest open account has reduced substantially, and credit scores take this into consideration. Lengthy credit histories are almost always rewarded with higher credit scores.

Sadly, once that closed account rolls off your credit reports in seven years, an account that otherwise would have been 17 years old suddenly disappears altogether, further reducing your score.

Credit Mix: Closing Your Only Card

Finally, because credit scores are usually higher when a consumer has a variety of credit types reporting to the credit bureaus, closing an account can really hurt your credit if it is the only credit card you hold. By having a credit card in your credit mix, you positively affect your credit score.

How to Manage your Credit Cards

For all of these reasons, keeping a few credit card accounts open will almost always positively affect your credit. However, remember that you just don’t want to max out your cards, because your credit scores will lower. Maintaining low balances and on-time regular payments will positively affect your score without putting your finances at risk.