Does closing a credit card hurt your credit score?

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Conventional wisdom says never to close a credit card because it will hurt your score.

Is that true? The answer is maybe, maybe not. As with most things credit score related, there are several factors to consider. So, let’s look at this a little closer and see what we can discover.

How does closing a credit card affect your score?

There are two major potential scoring impacts from closing credit card accounts. First and foremost, you lose any available credit on the card. This, in turn, will affect the credit utilization component of your credit score. This is the measurement of how much of your credit you have used on each individual card and across all your cards as well.

This factor is very important to your FICO score, coming in second behind payment history and counting for 30 percent of the overall number. The utilization ratio is even more important to your VantageScore, which uses a weighted score that counts utilization as “highly influential.” My recommendation is to keep your utilization percentage at 25 percent or less. The lower the better!

The impact of closing a card tends to fall most heavily on those whose capacity to charge is neither huge nor small, but “just right.” Here’s how this applies: If you have several cards and they are maxed out or fairly close to being so, closing the account is not going to make much difference in the utilization department. The damage has already been done to your score.

And make no mistake — maxing out a card is never good for your credit score. Closing a maxed-out card might be the best solution for other reasons, but remember that you are on the hook for the charges until they are paid off. Conversely, if you have a great deal of unused credit available and spread over a number of cards, closing one card down won’t make much of a dent in your utilization percentage.

Here’s a simplified illustration of why:

Card user No. 1 has a Visa, an American Express card and one Mastercard. Each has a $5,000 limit and each has $4,000 charged. No. 1’s utilization percentage is 80 percent on each card and 80 percent across all the cards. This is a damaging utilization percentage. Closing one card will bring the utilization percentage across all cards to 120 percent and still 80 percent of each open card. Yes, this is technically worse, but the original scenario was so damaging at 80 percent that the impact to the score would be small, if any at all.
Card user No. 2 has six credit cards — two Visa, two American Express and two Mastercards each with a $5,000 limit. User No. 2 uses the cards sparingly and never carries a balance. As a result, she never has more than a $1,000 balance spread over of all her cards. No. 2’s overall and utilization rate is 3.3 percent or $1,000 owed against $30,000 of credit available. This is an excellent utilization rate in the single digits. Closing one $5,000 card and losing its limit will bring her overall credit available to $25,000 with $1,000 owed, or a utilization rate of 4 percent. Still excellent.

The second area of potential scoring impact comes from the length of credit history factor. At 15 percent of your FICO score, keeping older accounts open longer can be a real plus. Before closing an account be sure to check how long it has been reported.

If it is one of your older accounts and you tend to churn your other cards every year or two, closing the account may be a scoring mistake when (in 10 or so years) the positive account history no longer shows up on your credit report.

How can you close a card without hurting your score?

It is possible to close a card without having much of an impact on your score. You can do this by paying all of your accounts off before you close the card in question. This way your utilization score will not be affected. But this only works if all of your credit cards have a low (relative to the line of credit available) or zero balance. Remember, if any of your cards have a balance (no matter how small), closing an account will increase your overall utilization ratio because you will have reduced your total available credit.

At the risk of repeating myself, I must point out that a maxed-out card has already done so much damage to your score that closing it will not make much difference. So in this instance, you will not hurt your score much more, if at all, by closing the card. And if you do so through a debt management plan (see further explanation below), your on-time payments will in fact work to bring your score up (in time) even though your accounts will be closed.

When should you consider closing a card?

There are valid reasons for closing a card, despite how it might affect your credit score.

It charges an annual fee

Perhaps it charges a high annual fee or offers rewards you can’t use, like travel benefits if you don’t plan to travel for the foreseeable future. Before you do that, though, look at any additional benefits such as cash back on food delivery charges or your wireless or cable payments. You may find that the annual fee is worth those benefits. (You could also request to switch to a different card that charges no annual fee if your issuer allows it.)

It’s a joint account with an ex

In the case of a separation or divorce, closing a credit card that is a joint account is probably the prudent thing to do. Even though a court may order your ex to pay, the lender will certainly look to you for payment if they do not pay. Court orders don’t mean much to a creditor when your name is on the account. Closing a joint account doesn’t protect you in that instance, but it will prevent future charges. If you decide to close a joint account, always notify the other party before you do, if only as a courtesy.

You’re struggling with overspending

For those who struggle with overspending, it may be too tempting to keep a card open. That’s a good reason to close it, even though you may lose a few points on your score until you pay down your balances. Better to sacrifice those points than dig a hole that may be hard to climb out of, financially speaking.

You have too much debt

Another reason to close a card may be because you find yourself with overwhelming credit card debt. Almost every creditor offers a hardship program for consumers who are struggling. These programs are generally short-term and usually do not require you to close the account, although some may.

However, if you choose to work with a credit counseling agency to pay off your account(s) through a debt management plan (DMP), you will probably have to close those accounts. A DMP is a systematic program designed to pay off your debt in five years or less. If you choose to go this route, I recommend using a certified nonprofit credit counseling agency from the National Foundation for Credit Counseling.

Can you close a credit card account with an outstanding balance?

Yes, you can close any account at any time for any reason. However, as I said before, closing an account does not relieve you of your responsibility to repay the entire balance. Once an account is closed you can continue to pay it off under the terms of the original agreement (which means the creditor cannot raise your interest rate or any other terms).

Why should you keep old accounts open?

As I mentioned above, keeping older accounts can help you with the scoring category that rewards credit longevity.

Additionally, you may have a card that you haven’t used in a while and think you should just go ahead and close it. But as we have seen, closing an account can have an adverse effect on your credit score. This is especially true if the account in question has a fair amount of available credit. So, unless there is another compelling reason to close it, keeping existing credit lines only helps your score.

You may be concerned that the lender will close the account because it isn’t being used, and you may be correct. This could happen after a year of inactivity and is, in fact, one of the most common reasons accounts are closed by the creditor. The simple way to prevent this from happening is to use the card occasionally.

But I don’t mean to use the card to incur more debt; instead, use it for purchases you have already planned to make and can afford to pay off immediately. Some good examples are gas and groceries. Both expenses should already be built into your monthly budget.

You don’t even have to use the card every time; use it every couple of months for one of these purposes and you will satisfy the creditor. (Just don’t forget when you do use it so that you don’t miss a payment. Missed payments can severely hurt your score.)

The bottom line

Closing an account should be approached in the same way opening an account is — with careful thought. Doing so will put you on the path to the credit score you want. Good luck!

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