Does Closing Account Affect Credit Score?

Does the act of closing a credit card account lower or increase your credit score?

A credit score is a key factor for any individual in the financial realm. It ranges from loan interest rates to rental applications, and many others. And, of course, you do not wish to engage in anything that might lower your score. But what about the case when one wants to close a credit card account that he or she does not need anymore? Will that be bad for your credit? We have to take a closer look.

This article highlights how Credit Scores are determined.

It’s important to first review what contributes to a credit score before getting into whether closing an account is detrimental to the score. The popular credit report scoring models are from FICO and VantageScore. While the exact formulas are proprietary, we know they take into account five main factors.

• Credit record – Whether one has been making payments on credit or through credit cards. This normally affects your scores most especially when it has a high value.
• Credit utilization – The extent to which you are using your credit limit. In general, lower levels of service utilization are associated with higher performance scores.
• Credit age – A measure of the average age of the accounts. The older the account, the higher the score.
• Credit mix – If you have different kinds of credit, including credit card, installment credit, mortgage, etc.
• New credit – The amount of new credit that you have in the course of the last couple of months. When new accounts are opened, they will reduce the average age of accounts, and this will negatively impact the scores.

I hope the above explanation helps you understand that the age of your credit accounts is just one factor among the many. Now let’s see what happens when you are closing the account In the following section.

A few weeks ago I wrote the article entitled Long-Term Consequences of Closing an Account which was about the consequences of closing an account in the long run.

Closing a credit card has implications for both age and utilization since you no longer have that account history or the available credit. This can lead to an almost instant deterioration of your credit score. However, there are a few nuances.

• The effect is usually minimal – Rarely goes above 5-10 unless you decide to close the oldest card in your portfolio or modify your credit utilization drastically.
• It bounces back in a few months – when more information is reported to the bureaus, the effects of having closed the account will not be as dramatic if one uses credit appropriately.
• It may be better to lose some points for a while – For instance, cutting up a department store credit card to avoid racking up more debt is beneficial in the long run despite the temporary decrease.

Hence, while card closure usually leads to a small and temporary decrease in scores, other effects are usually more significant. However, this raises the question of the long-term consequences.

How Closing an Account Impacts Your Credit in the Long Run

Once again, closing an account may reduce your scores slightly but using your credit responsibly in the future will help your scores recover within a few months. There are also questions about the long-term impact of such changes.

As pointed out above, you will likely have reduced credit age since you are closing an old account, assuming you have fewer accounts. It can also raise your utilization if charges are transferred to other cards when you lose the credit limit.

But here is the good news: That means that if one continues exercising responsible credit behavior – not keeping balances on the credit cards high, paying all the bills on time, only applying for new credit when it is necessary, etc., the effect of closure on the scores will be negligible a year or two later.

In the older account, you retain the history of the account even if it has been closed. In credit scores, credit accounts that were closed and paid on time remain to age for up to 10 years from the time they were closed. That way, you do not lose credit history, which is important when you are transferring from one financial institution to another.

So, should you close such accounts? Consider Your Situation:

Generally, cardholders have minimal or no long-term consequences on their credit score when they close an unused credit card as long they continue to maintain good credit behavior. But here are a few guidelines to consider if facing a decision about whether to close a card.

• Close accounts with which you are no longer associated – If you have many open cards that you rarely use, it is better to close them especially if there are charged fees. If the closure of the card would not affect your utilization and credit age, then consider closing the untouched cards. Begin with the newest accounts to the one that has the least impact.
• Do not close your oldest account - Although you are allowed to close new or inactive accounts, you should avoid closing your most experienced account if possible as it serves as the reference account that contributes to better credit age and score.
• Avoid annual fees and hefty penalties - Cut up your credit cards that come with annual fees or have steep penalties for non-usage once those fees are up. You can open a replacement card in case of utilization effects if necessary.
• Before terminating any account especially if you have been on the fence about it, you need to consider these advantages and disadvantages both in the short and long run. Consider all implications.

In most cases, credit scores bear the impacts for a short duration only as they rebound to normal upon joining an unused credit card account. The credit status of a year from now will not significantly change most of the time provided that the person maintains good credit habits throughout.

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