Does Closing a Credit Card Drop My FICO?

It is possible that by closing a credit card, you could inadvertently reduce your credit score. Whether closing the account reduces your FICO score depends on a number of factors, including your credit history length, how many accounts you currently have open, the different types of accounts you own and your outstanding credit balances.

FICO Scores

FICO is an acronym for the Fair Isaac Corp. credit scoring agency. FICO is the most widely recognized and frequently used credit scoring agency. Thirty-five percent of your FICO score is composed of your payment history; 30 percent is outstanding balances on your credit accounts relative to your credit limits; 15 percent is the length of your credit history; 10 percent is your amount of new credit; and 10 percent is the types of credit accounts you own. The factors that affect your FICO score the most are your payment history and outstanding balances relative to your credit limits because they collectively make up 65 percent of your FICO score.

Payment History

Just as a negative payment history hurts your score, a positive history helps your score. Because payment history makes up 35 percent of your FICO score, if you close a credit account with a positive payment history, it could possibly drop your score. Once you close the account, the information related to that particular credit card will eventually fall off your credit report and lenders will no longer be able to see the positive payment history associated with the account.

Credit Utilization

Another major factor in your FICO score is your credit utilization, which is the amount of credit you are using compared to the amount of credit available to you. Credit utilization makes up 30 percent of your FICO score. When you close a credit account, it removes the amount of available credit you have on that account, causing a recalculation of your credit utilization rate. This can result in a decrease in your FICO score because the credit limit on the closed account is no longer used in the credit utilization calculations and your remaining outstanding balances relative to your credit limits are higher.

Credit Utilization Example

You have two credit cards, each with a $10,000 limit. One card has a $2,000 balance and the other has a $5,000 balance. Your credit utilization rate is $7,000 total outstanding balances / $20,000 total available credit = 35 percent. Say you pay off the card with a $2,000 balance and close the account. Now, your credit utilization rate is $5,000 total outstanding balance / $10,000 total available credit = 50 percent. This increase in your credit utilization rate by closing a credit card can lower your FICO score.