Closing a credit card account may force you to curb your spending habits, but it is usually a poor decision if you want to raise your FICO score. Actually, closing a credit card account will likely lower your credit score. If you decide to close an account, failing to do it properly could hurt future applications for credit.
Misconception
Canceling a new credit card account, even one less than a day old, does not remove it from your credit report, according to the Motley Fool website. All revolving loans, and their positive and negative information, stay on your credit history for seven years. Closing a new account with a positive history just means you cannot further boost your scores by paying your bill on time.
Disadvantage
Closing a credit card account reduces your available credit, and if you have any outstanding principal, increases your debt utilization ratio. Debt utilization ratio refers to the portion of your available credit line that you use and counts for 30 percent of your FICO score.
Potential Benefit
Closing a new credit card could help your FICO score. The FICO formula penalizes consumers when they have more than seven revolving lines of credit, according to the Motley Fool. If you have a problem with spending and a large amount of debt, closing an account could help you focus on paying down your existing debt. This could eventually outweigh the hit to your debt utilization ratio.
Tip
If you close an account, make sure to ask the creditor to list it as closed by the account holder. Having a revolving line of credit closed by the lender appears poorly on a credit history, because it looks like the creditor decided you were a bad borrower. Keeping the card open for years to come will look good because lenders like to see someone who stays loyal to a company.
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