How Does Closing a Credit Card Account Affect Credit History?

Overview

Credit Card Types

Closing a credit card account does have an effect on your credit history, but this depends in large part on the type of credit card account. Sometimes closing the account can have a negative effect, sometimes a positive one--many different factors are at play.

First, major credit cards are better for your credit score than smaller, department store credit cards. Having a major credit card for some length of time with a fairly high credit limit is usually seen as a positive sign. The trouble comes when you decide to close that account. A general rule of thumb is that if it is your oldest credit card account, you should keep it. Closing out your oldest account makes your credit history look more dubious on paper. A shorter credit history is more risky than a longer one (in many cases), and lenders will frown at a shorter history.

It should be noted that closing the account does not remove its appearance on your credit report--the history will remain, though it will only last for a few years after that account has been fully paid off.

Closing Paid and Unpaid Accounts

Of course, closing an account without fully paying it off is even worse. Then you have money still owed on the card without a card--which looks like bad debt, and will negatively affect both your history and your score. You should always make sure that the account is fully paid off before you close it.

Many people wonder if closing a credit card account will help their credit history or make it look better. Usually, the answer is no. If you have many different credit accounts, a lender may feel uneasy about loaning you money, and in that case closing a few can positively affect your credit. But most people do not struggle with too many open accounts, and in this case closing an account does not have a positive effect on credit reports.

It also does not affect your credit score to have the account closed by the lender. Whether you or the lender close the account, the score effect is the same. The credit report, however, will note which party closed it, and some lenders do pick up on that with closer examination.

Utilization

Another reason lenders give for keeping credit card accounts open is the figure known as your utilization percentage. This is a ratio of how much "credit" you are using in relation to how much you have--it compares the balances and limits you have on your cards in total. This becomes a problem if you owe money on one or more credit cards and are closing out an account that is fully paid off. In effect, this drops your overall credit limit and raises your utilization figure, making it look like you are using a much greater percentage of your possible debt--another sign that raises red flags for some lenders.