Do Closed Items Help My Credit Score?

A three-digit number -- your credit score -- often is the key to whether you can borrow money for a new home or car, or receive low interest on your credit cards. The three major credit bureaus, Equifax, Experian and TransUnion, rank every borrower with a credit score from 300 to 850. Higher scores are better, and lenders tend to view these borrowers as less risky and offer lower rates. If you're considering canceling accounts to raise your score, think carefully before you do. It probably won't help.

How Credit Scoring Works

Your credit score depends upon five factors, some of which are more important than others. The two most important considerations are your record of on-time payments and the amount of money that you owe your creditors. These two factors alone make up 65 percent of your score. However, don't discount the other 35 percent. The types of credit you have, how many new or recent accounts you have and the length of your credit history make up the remaining factors. Length of credit history accounts for 15 percent of your score.

What You Owe vs. What You Can Borrow

When evaluating your creditworthiness, lenders calculate how much you owe versus how much available credit you have. Lower ratios are usually better. If you cancel an account, then even if you are a responsible borrower, your debt-to-credit ratio rises. Unfortunately, what you see as a commonsense approach to managing credit, lenders see as added risk. As a result, closing a credit line can lower your score. Nevertheless, keep in mind that your on-time payment history is the most important factor.

Managing Credit Wisely

The best way to keep a good score or to improve a poor one is to pay your accounts on time and in full every month. Also, keep your total revolving debt balances to less than 50 percent of your available credit, if possible. Credit cards are a type of revolving debt. Keeping a mix of loans is also wise. Mortgage loans are the best quality loan -- they're also the most difficult to qualify for. Car and other installment loans are the next best. Credit cards are last.

A Snapshot, Not a Life Sentence

If you have a poor credit score, don't despair. Credit scores are only a picture of your risk as of a particular moment in time. Although the consequences of bankruptcy, foreclosure and late payments are indeed severe, if you commit to maintaining good credit habits then your score will improve over time. If you are afraid that an open credit line offers too much temptation, then cancel it. That action is far less consequential than loan default, which stays on your history for seven years.