Will Closing Out Old or Unused Credit Accounts Raise My Credit Score?

It seems closing out unused credit cards should conceivably raise a credit score because it reduces your number of open accounts. This is not necessarily the case. In fact, the exact opposite may be true. Closing accounts may actually lower your score. With some advance planning, there are ways to minimize the credit effect of closing accounts.

Before Closing an Account

If you are thinking about closing an account, consider the age of the account first. Payment history is an important component of a credit score, and the longer an account has been open, the more beneficial it is to the score. If you are closing accounts due to annual fees or high interest rates, consider contacting the lender to negotiate better terms, especially if you have been a loyal customer. It is much easier to keep a current customer than sign up a new one, so some lenders may be willing to negotiate.

Score Impact

Even if there is no balance on the account you plan to close, cancelling the account can cause your score to fall. This is because the overall credit utilization will increase. Credit utilization refers to the amount of available credit that you have versus how much is in use. For example, a cardholder has two cards with a $500 limit on each. One card has no balance while the other has a $250 balance. The debt utilization ratio is the $250 of debt divided by the $1,000 available credit. The result is a 25 percent utilization ratio. Cancelling the paid off card increases this ratio to 50 percent. If there is a balance on the account you close, the effect will not show up on your credit report until after you pay the balance.

Minimizing Impact

Having no balance when canceling a card has little to no effect on credit. This is because the credit utilization ratio does not change when account balances are zero. A way to minimize the impact is by requesting higher credit limits. Since the available credit will decrease when an account closes, a higher credit limit will make up for the available credit lost.

How to Cancel Credit Card Accounts

It is best to pay off the card before canceling the account. This is to avoid having the lender raise the interest rate on the outstanding balance once it learns you will close the account. Contact the bank to verify there is no balance, and then request the closure. Follow up with a letter to verify your wishes. Cancellation may take up to a month. It takes longer to appear on your credit report. Ensure the report says the account was "closed at the customer's request."

Reasons to Cancel

Despite a potential lower credit rating, there are times when you need to cancel a card account. Credit cards with high interest rates are good candidates for cancellation. Accounts that charge exorbitant annual fees are also targets for closing. It is a good idea to close accounts that could be used by identity thieves or a former user, such as an ex spouse. A good time to cancel a card is when you open a new account or while taking advantage of a balance transfer offer.