Does Canceling Your Credit Cards Hurt Your Credit Score?

Canceling your credit cards can hurt your credit score. The damage doesn't come from the act of canceling the accounts, but rather from the effect that canceling them will have on key factors involved in calculating your credit score: the amount and types of credit available to you, the amount of available credit you are using and, in the long term, your payment history.

Credit Scores

Fair Isaac Corporation, the company that developed the formulas used to calculate consumers' credit scores, says those formulas involve five types of information, most of which can be affected by canceling credit cards. Your payment history accounts for the largest chunk, about 35 percent of your score. The amounts you owe on your accounts, including credit cards, make up about 30 percent. The length of your credit history is about 15 percent. The types of credit you use is 10 percent and recently opened credit lines account for 10 percent.

Payment History

If you've consistently been on time with your payments on your credit cards, then that will be reflected in your payment history, the biggest single factor of the score. Once you cancel a credit card, the account remains on your credit report, but it's listed as "inactive." Credit reporting bureaus will automatically remove inactive accounts after 10 years -- but the accounts can come off a lot sooner. Once a credit card issuer removes a closed account from its own records, the account also disappears from credit reports. When it does, that portion of your payment history disappears with it.

Amounts Owed

Credit scores consider not just how much money you owe, but also how much you owe in relation to your available credit. If you owe $10,000 but have $100,000 worth of available credit, that may look better on a report than owing $500 when you have only $600 worth of credit. When you cancel a credit card, you reduce the amount of your available credit. Say you have three cards, each with a $2,000 limit, and a total balance across all cards of $1,000. You're using only about 17 percent of your available credit. If you decide to cancel two of the cards and consolidate the balances onto the third, suddenly you're using half of your available credit. That can hurt your score.

Other Factors

Canceling credit cards may also hurt your score in terms of the types of credit you use. If you have a home mortgage, a car loan and credit cards, you're a more diversified credit customer than someone with just a mortgage and car loan, and that's reflected in a higher score. Cancel the credit cards, and the score comes down. Also, if the credit card you cancel is the one you've had the longest, that will shorten your credit history, which will also pull your score down.

Expert Insight

Barry Paperno, product support manager for Fair Isaac, told Bankrate.com in 2008 that as far as credit scores are concerned, there's "never" a good reason to cancel a credit card account. The scoring formula does not penalize you for having "too much credit," and it doesn't penalize you for having accounts open but not using them.