Credit reports and credit scores can seem mysterious, with their upticks and downswings responding to minute events in your credit history. But there's little mystery involved; most credit scores are based off a formula incorporating several known factors related to your use --- positive, negative or mixed --- of available credit. Learn how closing a credit card affects a credit report will help you determine whether this is a smart financial move for you.
Credit Scores
When people talk about credit reports, they're often concerned with the three-digit number known as a credit score. Credit scores don't appear on all credit reports, but they're a strong indicator of your ability to handle credit accounts. Low scores often indicate missed payments, high debt loads or debt-to-income ratios or accounts that have been turned over to collections. High scores frequently reflect on-time payments of more than the minimum required, low debt loads and lengthy, positive histories with lenders. The credit score is determined through a calculation that assigns 35 percent of your score to payment history, 30 percent to amounts owed, 15 percent to length of credit history, 10 percent to new credit and 10 percent to types of credit.
Quick Fix?
Closing a credit card isn't a quick fix to positively affect your credit report. In fact, rarely, if ever, does closing a credit card boost credit scores, according to MSN Money. Having too many accounts open can hurt your credit score, especially if they've been recently opened or include excessive amounts of revolving credit such as credit cards, which aren't counted as positively as installation loans like students loans, auto loans and home mortgages. But closing your credit card account can negatively affect a credit report if the account held a large, unused available balance contributing to an attractive ratio of used-to-unused credit.
Credit History
Some consumers worry that closing a credit card may negatively affect a credit report, thinking that their lengthy, positive credit history with that lender will disappear. This isn't the case. If your relationship with a credit card company extends back 20 years before closing the account, your credit report will reference that positive relationship for up to 10 years. Of course, the relationship won't continue to lengthen after the account has been closed, but if you've already amassed years of positive credit, this may not be a concern. However, closing a credit card account when your other credit cards have been open for just a few months can hurt your score, according to Bankrate.
Card Type
Credit cards frequently occur in two types: traditional credit cards and cards offered through department stores. Traditional credits cards are more heavily weighted and positively viewed compared with department store credit cards, so closing out a traditional card when all other cards came from department stores could hurt your account.
Identity Theft
Some consumers worry that large amounts of unused credit card balances might make them attractive targets for identity thieves. Rather than closing unused accounts, another option is to call the lender and request a lowered available balance.
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