While closing a credit card may seem like a good way to improve your score, it could actually have the opposite effect. When you look at the factors that influence your credit score, the most important ones are the payment history (which accounts for 35% of your score) and the credit utilization ratio (30%), followed by the length of your credit history (15%), and your credit mix and new credit inquiries (both 10%). So, when you close a credit card you could impact both your utilization ratio and the length or of your credit history.
Closing your card has an immediate effect on your utilization ratio, which is the combined balance of how much you owe on your credit cards compared to the total amount of credit you still have available. Your credit score takes into consideration both the individual credit utilization of each card and your overall utilization ratio. So, if you close a credit card, you will reduce how much overall credit you have available and, consequently, increase your utilization ratio. Once your utilization ratio goes above 25% or so, your credit score could be impacted negatively.
In addition, your length of credit history could also be affected, especially if you have a short history or the credit card you are closing is one of the oldest ones. You should keep your older cards open and in good standing, since they are the ones that contribute the most to the longevity and establishment of your credit history. Yet, the measure in which your score is impacted by an increased utilization ratio or an updated length of credit history depends on your overall credit report. If your overall credit balances are low and the credit card you are closing has a low credit limit, the impact could be relatively less significant.
Generally speaking, it is recommended to keep the card open, even if you don’t use it. So, before you make a decision, evaluate the consequences they could have on your credit score. Review your credit report free of charge once every 12 months at AnnualCreditReport.com and do an overall assessment of your report. And if you need additional credit information, reach out to a certified credit counselor from an NFCC member agency. They are always ready to help.
Bruce McClary, Vice President of Communications
Bruce McClary is the Vice President of Communications for the National Foundation for Credit Counseling® (NFCC®). Based in Washington, D.C., he provides marketing and media relations support for the NFCC and its member agencies serving all 50 states and Puerto Rico. Bruce is considered a subject matter expert and interfaces with the national media, serving as a primary representative for the organization. He has been a featured financial expert for the nation’s top news outlets, including USA Today, MSNBC, NBC News, The New York Times, the Wall Street Journal, CNN, MarketWatch, Fox Business, and hundreds of local media outlets from coast to coast.