Does Your Credit Take a Hit if You Close an Account?

When you don't know the way that credit rating bureaus track your spending and credit history, you can't make a sensible decision when it comes to closing a credit card. For example, although it may make logistical sense for you to consolidate your debts onto a single credit card and close out the others so that you have fewer bills to keep track of, this looks bad on your credit report. Your credit takes a hit when you close an account --- even if your credit score goes back up, the repercussions of closing an account can last a lifetime.

Maintaining Depth

You want to have as long a credit history as you can --- this is called depth. Potential lenders look for depth in your credit history because it shows that you've responsibly managed debt for a considerable period of time. Closing out credit cards, especially ones that have been open for a long time, eliminates this depth. Closed accounts with missed payments stay on your credit report for seven years, and other closed accounts stay on for 10 years. After that time, they disappear forever, as if you never had the card --- or the credit --- in the first place

When to Close

As a general rule, you shouldn't close a major credit card, but you may decide that managing other cards --- such as store-specific cards --- is more trouble than it's worth. In that case, close out those cards but only if you haven't had them as long as your major credit cards. Store cards are considered lower-quality credit, so closing them isn't necessarily unwise, but you shouldn't close out more than one per month. Never close a card right before applying for credit or a loan. When you close a card, your credit takes a temporary dip. As for major credit cards, if you find yourself unable to make payments, speaking to your credit card company may help --- for example, you may be able to establish a payment plan for which closing out your account is a condition.

Managing Debts

Moving debt around doesn't improve your credit score --- in fact, it may lower it. For example, say you have five credit cards with low amounts owed on each. If you use one of the cards to pay off the other four, then close the other four, your credit takes a hit. It does so not only because you closed the cards, which exhibits unstable behavior, but because you owe the same amount of money but to only one account --- a predicament that lowers, not improves, your score.

Maintaining Good Credit

If you have a number of credit cards with no money owed on them, that may eventually hurt your credit score. Not using your credit card typically leads your credit card company to eventually close your account, which looks bad on your report. Prevent this from happening by using your card strategically. Once every five or six months, use your credit card for a single purchase. Pay off the balance in full --- this helps your report by keeping the card open, building depth and demonstrating that you pay your bills on time.