Can Closing Accounts Better My Credit Score?

Companies like FICO and the three credit bureaus calculate your credit score through a proprietary formula. This three-digit number summarizes your perceived ability to meet financial obligations. Creditors use it in their decision-making process when you apply for new accounts. You can take certain steps to make your score better, but closing existing accounts is not always a wise move.

Negative Effects

Credit scores take numerous factors into account, including how long you have had each of your accounts, how well you meet payment deadlines, your available credit limits and outstanding debt. Scorers look more favorably on older accounts, so it can actually hurt if you close those accounts. You also need to keep a good balance between the amounts you owe and your credit limits. Closing accounts means losing those credit lines, which makes your debt load look worse, according to Liz Pulliam Weston on MSN Money.

Positive Effects

You can indirectly help your credit score by closing some accounts if you have problems budgeting and are tempted by available spending power. You need on-time payments and modest balances for a good score. People who max out all of their cards often have trouble making payments, and delinquencies quickly trash the score.

Considerations

You can also manage your accounts to keep your credit score up, rather than closing them. Use the credit cards twice a year for items that are small enough to pay off immediately. Prompt payment means no interest charges, and the positive activity gets reported to the credit bureaus and helps improve your score. The federal Credit CARD Act of 2009 forbids card issuers from charging inactivity fees if you keep your account open without using it frequently.

Alternatives

The My FICO credit score website discusses several ways to improve a credit score. On-time payments are the most important factor, and maintaining low balances and limiting credit applications also help. Only apply for new cards or loans when they are truly needed. Use older accounts instead when possible. Confine shopping for big loans like mortgages and car financing to a week a two, so FICO and the other credit scorers count the multiple applications as one inquiry to minimize the impact on your score.