Does Closing Credit Cards Affect Credit Scores?

You may think that closing a few credit cards makes you more attractive to lenders, because it lowers the amount of debt you can carry, but it can sometimes have the opposite effect. Instead of eliminating history on the account from your report, closing cards hurts your score mostly by reducing a key component of any score: credit utilization ratio.

Identification

The most important thing you lose from closing your credit card is available credit. The FICO score formula factors in your debt to credit limit ratio. If, for example, you have $500 in credit card debt and a limit of $5,000 across your cards, you have a relatively low utilization ratio of 10 percent. Close a few cards and bring that limit down to $1,000 and your utilization shoots up to 50 percent---very high in most financial expert's eyes. Maxing out your credit limit could take up to 45 points off of your score.

Misconception

Closing a card does not delete its history---which counts for 15 percent under the FICO formula---from your credit report. The credit agencies report positive data for 10 years on closed accounts. You will, however, lose future history on the account and lower the average age on your account---another factor in credit history---when you open new accounts.

Benefit to Score

Downsizing your credit card accounts could have a positive effect on your score if you have too many accounts overall. The FICO model starts to harm your score a bit when you acquire more than seven cards, according to the Motley Fool. It could boost your significantly over time if you have a card on which you constantly miss the minimum payment or cannot resist the temptation to spend.

Tip

Instead of closing your credit card accounts, pay down existing credit card debt and avoid further spending charge on the accounts other a few small charges to keep the card active. Credit card accounts can stay on your report forever, because the agencies report the entire history of current accounts.