Will Closing Credit Cards Affect Credit Score?

One way of preserving good credit is by using credit cards. They enable you to prove your creditworthiness by making at least the minimum monthly payments. It is financially wise to close the credit cards that you do not need or do not actively use, but does closing such an account affect your credit rating? Here is what you should know.

How do Credit Scores work?

To see if closing accounts affect one’s score, it is important to know what makes up the credit score in the first place. FICO and VantageScore are the two types of credit scores that are most often employed in the credit reporting process.

While the formulas differ, both consider some combination of yours.

• Credit history – Whether one pays his bills or rents, utility bills, etc. This is usually the major reason why individuals are discouraged from engaging in certain activities.
• Credit utilization – The sum owed as a proportion of the total credit limit across cards. It is better to use less than 30 percent per card.
• Credit history length – Number of months of credit history. The longer the history is the better.
• New credit applications – These are instances where one opens several accounts within a short duration, and they negatively affect the scores.
• Credit utilities - Having credit cards, car loans, and home loans.

FICO and VantageScore rate these factors and provide a three-digit credit score ranging from 300 to 850. The higher the better – a good to excellent credit score is anything starting from 700 and ending in 850. Some of those main scoring factors could be either negatively or positively affected by the act of closing credit cards.

Closing Credit Cards and Credit History Length

The closure of credit cards has negative impacts on the credit score in the following ways; The first way through which closure of credit cards leads to a low credit score is through reduction of the average credit history. Collection activity is good for 7 years and public records are good for up to 10, but both FICO and VantageScore want to see that you can handle credit responsibly over the long term, not just the most recent few months. Closing your oldest credit card accounts is a bad idea because it reduces your average credit card age. The fewer active accounts reporting your long history, the greater influence each closed account will have.

For example, say Joanne has five credit cards.

Card 1 - opened in 2015 Card 2- Company opened in 2016 Card 3 – Credit card opened in 2018 Card 4 – It was opened in the year 2020. Card 5 – It was opened in 2022.

Her oldest account is seven years old. But if Joanne closes Card 1 and Card 2, then her length of history reduces drastically even though she has three more accounts that she is currently using. Now she only has an account with four years of experience.

This decrease in average age could knock several points off her credit scores. How much depends on the scoring model and her other credit report statistics. However, the length of the credit history is another factor that needs longer the better as this implies that an individual is creditworthy.

Closing Credit Cards and Credit Mix

Secondly, canceling cards also affects the credit mix factor albeit to a limited extent since it reduces your account history. Other aspects of credit management that the credit scoring models like to see are your ability to manage installment credit which is not only credit cards but installment loans such as auto financing, mortgages, and student loans. Having both shows the candidate’s ability to manage all types of credits as well as monthly payments.

Though closing an old inactive credit card or retail store charge card, does not drastically affect your credit mix standing, you do reduce the number of credits shown in your history slightly. Suppose Jeff has three credit cards plus a car loan, then he has a mortgage. His credit utilization is a little bit right down the middle, which is quite balanced. But if he shuts two credit card accounts, even if he retains an open credit card, his mixed profile gets a little down.

Once more, the type of credit you carry is said to contribute very little to your credit score. Yet, the more diverse, the better as far as credit mix influence is concerned.

Credit Management strategies such as the closure of credit cards and credit utilization.

The former is much more critical and that is your credit-to-credit utilization – the total amount owed about the credit limits on your cards and revolving credit. As mentioned, it is wise to spend less than 30% of one’s total credit limit on all the cards that one is privileged to own. Thus, $3,000 of card balances on a total of $20,000 in credit limits is 15% usage. This is a percentage of your account that needs to be low for you to maintain good credit scores.

However, if you close credit cards with available credit you are not using, the utilization ratio increases. Imagine Miriam has two credit cards.

• Card 1: balance $2,000, credit limit $10,000
• Card 2: no balance, but the credit limit is $5,000

Her total credit limit on the two cards is $ 15,000. If she has a balance of $2,000 today then her total credit card utilization is at 13 percent ($2,000/$15,000). Perfect for her credit rating!

However, if she can close the unused Card 2, then the situation will look as follows: Miriam’s total available revolving credit will decrease to $10,000. But she still has to pay that $2,000. All of a sudden, her credit utilization increased to 20 percent ($2,000/$10,000). And as the rate of utilization rises, credit scores drop.

So Miriam, for instance, closes a card to manage her cash flow, only to harm her credit rating. This catch is why credit experts advise that, if you are not charging to the limit, do not close your older and higher limit accounts. Having them open assists in keeping a lesser overall utilization even though you may have balances on one or two other cards.

Balancing Credit Consequences When Closing Accounts

The examples listed above show that when you close the credit cards you do not need or do not use, it will be detrimental to your credit. History gets shortened, your accounts’ distribution is altered slightly, and your credit utilization ratio may rise. If for instance, the applicant is planning to take an auto loan or mortgage soon, such a drop in score means higher interest rates.

However, most financial gurus concur that having unused credit cards is not without some risks. Hackers might steal your identity, open accounts in your name, charge lots of money on the accounts, and leave you to face the consequences. It is easy to spend more than available credits, even with the best of intentions. Open revolving accounts make lenders believe that you may rely on credit often even if you are not using them at the moment.

If you decide to close a longstanding credit card, do so with caution. Ideally, keep your accounts oldest if possible - length of credit history especially older and more diverse credit types are favorable for your credit profile. It is also important not to close many accounts at a time. You may see your credit score drop by five, ten, or even twenty points per closed card depending on the age of the card and your credit report statistics.

Also, have a strategy of switching the balances or changing the spending to maintain the utilization low if some of the accounts have higher limits. You may want to request credit line increases on active cards before canceling those that you rarely use.

This article gives a clear and concise account of how credit card closure affects credit score through history length, credit mix, and utilization. It also gives information on how to reduce any negative impacts if you are to close accounts. Please feel free to ask if you want more information about any part of the article.

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