Closing a credit card can be a satisfying experience, but before you make any decisions, consider the effect that closing a card will have on your overall creditworthiness. In some cases, closing a card can lower your FICO credit score, which lenders use to determine how financially responsible you are. The lower your FICO score, the less desirable of a customer you will be to banks and lenders.
Loss of Positive Credit History
If you close a credit card account with a good payment history, the account will be removed from your credit report within 10 years at the latest, and sometimes much sooner. Credit issuers may delete the records of your paid account if they wish, which is not uncommon, and any positive payment history that you had with them would be removed from your credit report. Positive credit history demonstrates to lenders that you are responsible, so it factors into your credit score significantly. According to Bankrate.com, if the credit card that you cancel has a long payment history, its removal from your report is likely to lower your score.
Decrease in Available Credit
Credit reporting agencies keep careful tabs on the amount of credit that you have and the amount of credit that you use. The percent of credit used is called a "utilization rate" and is a significant part of determining creditworthiness. The less credit you use, the higher your score. As Investopedia.com points out, if you cancel a credit card with a high credit limit but a $0 balance, based on the new, lower amount of available credit, you will increase the percent of credit that you are using, which is likely to affect your credit score.
Creating the Appearance of Maxed-Out Cards
According to Investopedia.com, if you have credit cards with balances that you want to close to remove the temptation of using them, you can close them to new purchases but they will not be officially closed until you pay off the balance. When you deactivate these cards, the available credit may default to zero. This will raise your overall ratio of used credit to available credit, which is likely to lower your score.
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