Does Closing Small Credit Accounts Help a Credit Report?

Consumers often close small lines of credit because they think it will help their credit rating; instead, this can be very damaging to a credit rating. In general, closing any account dings every category in the FICO credit scoring system. Instead of closing small lines of credit, it is better to use them sparsely to keep them active.

Identification

Closing small credit accounts damages your score because you may lower the average age of your accounts. In the FICO rating system, the average length of your credit accounts counts for 15 percent of your score. If you have to apply for new accounts with a larger limit, the inquiry dings your score by up to five points for each application and lowers the average age of your accounts even further.

Credit Utilization

The percent of your credit limit you use, or credit utilization, can account for dozens of points. You should never use more than 36 percent of any limit -- aggregate across all of your accounts or on each account -- so every bit of credit available is important to lower your credit utilization rating. For example, if have $10,000 in credit card debt with a total limit of $40,000 across all accounts, you have a utilization ratio of 25 percent. Close accounts with a limit of $10,000 and your utilization ratio goes up to 33 percent.

Mix of Credit

Having more than seven revolving accounts, such as credit cards and home equity loans, damages your credit rating, according to Dayana Yochim of The Motley Fool. If you close all of your credit cards, you reduce your mix of credit by 10 percent. Ideally, you should have two revolving accounts for every installment loan. For example, if you have a credit and home equity loan, you should have a single student loan or mortgage.

Tip

Put a charge on those small credit card accounts every couple of months to keep the lines active. You can pay the balance as soon as you make a charge to have the creditor report an on-time payment. However, consider your ability to manage credit. If you constantly forgot about those small lines of credit, missed payments will do more damage than any boost you get from keeping the accounts active. You can ask the creditor for a limit increase to gain access to more credit without applying for a new account.