How Closing a Credit Card Can Hurt Your Credit Score

Credit scores seem pretty simple on the surface — basically acting as a three-digit representation of our usage of credit over the years. Boiling down entire credit reports into a convenient number we can digest helps us know where we stand. But it’s also important to understand what goes into cultivating that score, as there are many moving parts behind the scenes working together to influence our creditworthiness in the eyes of lenders.

Many credit card holders ask if it is a good idea to close accounts they’re not using. As with most financial questions, it depends. Let’s take a closer look at the effect closing credit cards can have on your credit score — as well as your overall financial health.

What Factors Affect Our Credit Scores?

The factors making up our FICO credit scores are:

• Payment history (35 percent): The most influential factor is how timely and consistent you have been with payments across your accounts. Lenders consider your past behavior as a predictor of your future likelihood to make payments — or miss them.

• –          Credit utilization (30 percent): The percentage of available credit you’re using is called your credit utilization rate. Experts recommend keeping this figure below 30 percent on each individual account — and all of them collectively. Using a large percentage of your available credit may signal you’re overextended.

• Length of credit history (15 percent): Credit scores consider the age of your oldest account, how recently you’ve used accounts and how long you’ve held your accounts. The longer, the better in terms of your score.

• Mix of credit (10 percent): This figure looks at the types of credit you carry, like credit cards, mortgage loans, retail accounts, personal loans and more. Having a healthy mix can work in your favor — although making timely payments across all accounts matters more.

• Recent credit (10 percent): Opening multiple new accounts within a short timespan can make you appear riskier, which is why your credit score takes your recent behavior into account.

The matter of closing credit card accounts primarily has the potential to affect the length of your credit history, credit mix and utilization ratio as well.

Consequences of Closing Credit Card Accounts

There are many reasons someone may be toying with the idea of closing a credit card account.

For instance, the goal of debt consolidation for bad credit is to get the balances off high-interest debts like credit cards. If someone takes out a loan and uses it to pay off all their credit cards, the next logical step may seem like closing those accounts altogether.

There are three primary ways in which closing a credit card can negatively affect your credit score:

1. Your pool of available credit decreases, which could cause your credit utilization to rise.

2. The average age of your accounts may decrease, especially if you close an older account.

3. Your credit mix may change, especially if you only had one or two cards to begin with.

For these reasons, many experts advise keeping accounts open — provided you can risk the temptation to run them up again and you’re not paying annual fees for an otherwise dormant card. If having a credit card open may cause you to accumulate debt that’s hard to pay off, it’s generally better to take the comparatively small hit that occurs from closing your account than it is to risk missing payments in the future. Paying annual fees on open accounts that are just sitting there is also generally a waste of money.

Closing a credit card can hurt your credit score, but there are some valid reasons to decide to do so. Knowing how and why this action can impact your score can help you minimize the damage.