Liz Pulliam Weston points out in her December 2010 MSN Money article, "Weird stuff that wrecks your credit," that you can lose points on your credit score by closing a credit card with a relatively strong history. Closing an account affects your credit utilization, which is a significant component of your FICO score.
FICO Score
Many Americans have heard of FICO and know it relates to their credit, but often know little beyond that. FICO is the most prominent credit score model, originated by the Fair Isaac Corporation. It serves as the model that the three major credit reporting agencies -- Equifax, Experian and TransUnion -- use to develop their credit scores. According to the Fair Isaac Corporation website, MyFICO, your individual credit score includes many specific factors divided among five major categories -- payment history, credit length history, amounts owed, types of accounts and new accounts.
History
Closing a credit card account does not immediately erase your credit history related to that card. That is important because the combination of your payment history and the length of credit make up half of your FICO score value, notes MyFICO. Your credit card account and any negative activity associated with it, such as late payments, remain on your credit report for seven years after the last activity, according to Dayana Yochim of "The Motley Fool" in his article "Don't Cancel That Credit Card!" On the other hand, if you have a positive credit history with the card, you lose that credit-score benefit seven years from your last use if you close the account.
Credit Utilization
The amounts owed section of your credit score largely emphasizes your credit utilization, or debt-to-credit ratio. This is the amount of your available credit currently in use -- that is, the amount of debt you carry relative to your credit limit. A lower ratio helps your score, whereas a high credit utilization, on a single card or overall, hurts your score. If you have a zero balance on a card with a $5,000 limit, and you close that card account, you lose that zero percent card utilization and decrease your overall credit limit, both of which raise your overall credit utilization.
Other Considerations
If you want to ensure you don't use the card, consider putting it away a place safe, such as a safe deposit box, as an alternative to closing the account. However, the card provider may close the account following an extended period of inactivity. The month when the card is last used begins the seven-year period in which this account will be included on your credit report. Close a credit card account that was opened more recently than one you've had a long time if you have a choice, because keeping the older one helps your credit length history more and, therefore, hurts your credit score less.
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