To Close or Not to Close Your Credit Card – That is the Question!

Lori Lamb1,434 CommentsCredit and Debt

Do you want to close a credit card account but are unsure how it will affect your credit score? There are many reasons why we may want to close a credit card, such as avoiding annual fees, too many fees, high interest rates, or unsatisfactory customer service. Whatever the reason, please review the following to determine what is best for you:

The Fair Isaac Corporation FICO™ states “They would never recommend closing a credit card for the sole purpose of raising the score.” So it is best to think of your long-terms goals first before closing a credit card. Are you planning on financing a car or home? Or are you planning on refinancing soon? You may want to hold off on closing a credit card and wait until after your financing is done. If so,

The FICO scoring model takes into consideration your credit utilization. This is the percentage of total credit used in comparison with the total lines of credit. This is 30% of your FICO score.

Let’s look at this example:

Currently if your total lines of credit in your credit report are $80,000, and your total credit balances are $30,000. Divide your balances by your limits: $30,000 divided by $80,000 = 38% utilization.

If you close six accounts with a total of $40,000 in credit limits. Your total lines of credit are reduced to $40,000. So now divide your $30,000 balance by your $40,000 line of credit which = 75% utilization.

Closing an account with a zero balance may have little effect on your score.

Another example of an Open Account with a balance:

Limit               $20,000

High Credit H/C $5,000

Balance           $5,000

If reported this way the account will not look maxed out (25% utilized)

The same account with a balance but closed:

Limit                   -

High Credit H/C $5,000

Balance           $5,000

When the creditor reports the account this way (without the limit/ line of credit) it will look maxed out 100% utilized. As the FICO scoring model uses the High Credit in place of the limit/line of credit to calculate the utilization portion for the individual account.

Finally, if you close an account, you may not only increase your credit utilization and lower your score, but you may be losing a long time credit account, and will eventually lose the history. Good payment history accounts that are closed will eventually fall of your credit report in 10 years from the date of last activity.

You can find more about the FICO™ scoring model at www.MyFICO.com or in our Consumer Guide to Good Credit eBook.

Photo: jakecaptive

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