What Is the Impact of Closing Credit Card Accounts on Credit Scores?

Closing a credit card account can have both short-term and long-term effects on a consumer’s credit score, depending on various factors such as the consumer’s credit utilization, the age of the account, and the overall impact on their credit history. Understanding how the closure of a credit card affects credit scores is important before making any decisions about closing an account.

Key Impacts of Closing a Credit Card Account on Credit Scores:

1. Credit Utilization Ratio:
   • What It Is: Credit utilization is the percentage of available credit you are using across all credit cards. It is a key factor in your credit score, and it accounts for about 30% of your FICO score.
   • Impact of Closing an Account: When you close a credit card, you reduce the total amount of credit available to you. If your outstanding balances remain the same, this will increase your credit utilization rate. A higher credit utilization ratio typically lowers your credit score.
   • Example: If you have two credit cards, one with a $5,000 limit and one with a $3,000 limit, your total available credit is $8,000. If you have a $2,000 balance across both cards, your credit utilization is 25% ($2,000 ÷ $8,000). If you close the $3,000 limit card, your total available credit drops to $5,000, increasing your utilization to 40% ($2,000 ÷ $5,000). This can negatively affect your credit score.
2. Length of Credit History:
   • What It Is: The length of your credit history, including the average age of your accounts and the age of your oldest account, is another important factor that influences your credit score. It accounts for about 15% of your FICO score.
   • Impact of Closing an Account: Closing an older credit card can shorten the average age of your accounts, which could lower your credit score. The longer your credit history, the better it reflects your ability to manage credit responsibly.
   • Example: If you close a card that you’ve had for 10 years, your average credit history length will be shortened, which may slightly reduce your credit score. If your credit history is relatively new, the impact may be less significant.
3. Credit Mix:
   • What It Is: Credit mix refers to the different types of credit accounts you have, such as credit cards, mortgages, and installment loans. Having a diverse credit mix can positively influence your credit score.
   • Impact of Closing an Account: Closing a credit card could reduce your credit mix, especially if that card is your only credit card, which might hurt your credit score. Creditors like to see that you can handle different types of credit responsibly.
   • Example: If you only have one credit card and close it, your credit mix will no longer include a revolving credit account, which may affect your score. However, if you have multiple credit cards or other types of credit accounts, the impact will be smaller.
4. Impact on Your Credit Report:
   • What It Is: Closing a credit card does not immediately remove it from your credit report. It will remain on your credit report as a closed account and continue to affect your credit history until it eventually drops off after 10 years (for accounts in good standing).
   • Impact of Closing an Account: While closing an account does not immediately delete it from your report, it can still have an impact on your credit score. If the account is in good standing, the positive history will still be counted toward your score. If the account had a negative history (late payments, high balances, etc.), closing it may improve your score over time.
5. Hard Inquiry:
   • What It Is: When you apply for a new credit card or loan, the lender performs a hard inquiry (also called a .hard pull) on your credit report. This can temporarily lower your credit score by a few points.
   • Impact of Closing an Account: If you close a credit card and then apply for a new one to replace it, the new card application will result in a hard inquiry, which may slightly lower your score. If you don’t replace the card, there will be no new inquiry, but the effects of closing the card on your utilization and credit history will persist.

Factors to Consider Before Closing a Credit Card:

1. Current Credit Utilization: If you’re carrying a balance on your remaining cards, closing a credit card with a high limit may increase your utilization ratio and reduce your credit score. It’s generally better to pay down balances before closing accounts.
2. Account Age: If the card you’re considering closing is one of your oldest accounts, its closure will shorten your credit history, which may negatively impact your score, especially if your credit history is relatively young.
3. Annual Fees: If the credit card has a high annual fee and you don’t use it frequently, it might make sense to close it to avoid paying the fee, but weigh this against the potential impact on your credit score.
4. Rewards and Benefits: If the card offers valuable rewards or benefits (such as cashback, points, or travel perks), consider whether these outweigh the potential negative impact on your credit score.
5. Credit Score Goals: If you plan to apply for a major loan (such as a mortgage or car loan) in the near future, it may be best to avoid closing any credit cards until after the loan is approved, as it could negatively impact your credit score.

Example:

If a consumer has three credit cards with the following limits: $2,000, $5,000, and $10,000, and they close the $2,000 card, their total available credit will drop to $15,000. If they have an outstanding balance of $4,000 across the remaining cards, their credit utilization rate will jump from 26.67% ($4,000 ÷ $15,000) to 33.33% ($4,000 ÷ $12,000). This could lead to a decrease in their credit score, as utilization is a significant factor.

Conclusion:

In conclusion, closing a credit card can affect your credit score in various ways, especially by increasing your credit utilization and shortening your credit history. However, if done strategically, the impact can be minimized. Always consider the trade-offs and consult your credit report before making any decisions. Let me know if you need further details or examples!