Your credit score is a key factor in whether creditors give you low-interest loans and even whether you get a loan at all. Closing a credit card account can affect your credit score, but the effect isn't always negative. By carefully timing the closing of your account, you can minimize the effects on your credit score.
Weight on Your Credit Score
Credit reporting agencies use five criteria to calculate your credit score: the length of your credit history, your repayment history, the types of credit you have, the amount of money you owe and the amount of new credit you have. Closing a credit account affects the amount of money you owe in relation to your available credit. This ratio accounts for 30 percent of your score -- second only to your payment history, which accounts for 35 percent -- yet its impact may not lower your credit score in all cases.
Learn Your Credit Score
If your score is above 700 -- which is a high scores since the maximum score is 850 -- you may be able to close an account and still maintain a high score. Yet if your score is lower than 700, closing an account can lower your score enough to make you an undesirable borrower in the eyes of creditors, despite other aspects of your credit history. Before deciding whether to close one of your credit card accounts, learn your credit score. Under the Fair Credit Reporting Act, you're entitled to one free credit report from each bureau every 12 months, which you can order from Annual Credit Report.com, the official credit reporting agency for the FCRA.
Debt-to-Credit Ratio
The primary reason closing credit accounts affects your credit score is that it changes your debt-to-credit ratio; that is, the amount of money you owe in comparison to the amount of credit available to you. For example, if you have a credit card with a $2,000 limit and another with a $3,000 limit and you owe $1,000, you have $5,000 in available credit and a debt-to-credit ratio of 20 percent between the two cards. By closing the card with a $3,000 limit you increase that ratio to 50 percent. Closing an account doesn't affect this ratio if you owe no money, but if you owe anything, closing an account increases the amount of money you owe in relation to your available credit.
Protect Your Credit Score
It's not uncommon to want to close an account after you pay off the debt. Instead of taking a hit to your credit score for doing so, wait until after you obtain any loan you need so you can prevent a lower credit score from disqualifying you. If closing an account isn't important to you, pay off the debt and keep the account open. This eliminates the chance of having to apply for a new account with the same company should you change your mind about closing it.
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