Does Opting Out of Changing Credit Terms Hurt Your Credit Rating?

The Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 put heavy restrictions on the entire credit card industry, such as requiring credit card companies to allow people to opt out of changes to the terms of their account. Opting out almost always entails closing the account. While opting out may help you to control your finances or get you out a higher interest rate, you can probably expect your credit score to drop.

Identification

Closing a credit account makes it appear as though you need more of your available credit. The FICO credit scoring model factors in how much debt you use compared to the total limit of all your available cards -- this is called credit utilization. If, for example, you have $3,000 in debt and a limit of $10,000, you have a credit utilization of 30 percent. Close a card with a $1,000 limit and your utilization goes up to 33 percent.

Considerations

If the credit card you close has no balance and a low limit, the temporary damage to your score will be minimal. What you should watch out for is a card with a high balance and a minimum payment you cannot make. Once you close a card, the bank will expect you to make payments under the existing terms. If you miss payments, the bank can still report the delinquency to the credit rating agencies. Missing payments or having the account go into delinquency will hurt your credit score.

Credit Mix

Ten percent of a credit score comes from how many different types of accounts you hold. In theory, managing several kinds of loans at once gives you a more expansive experience with payment plans than just a single type of credit. If you already have another credit card, closing one has a negligible affect on your credit mix.

Misconception

Closing a credit card account does not eliminate the history -- worth 15 percent of your FICO score -- of it from your credit report; you will just stop accruing any new information for the account. Also, opting out does not always mean you have to close the account. Sometimes, the lender will try to raise rates in return for better rewards for each dollar you spend if you accept new terms. For example, the lender could offer to raise your cash-back reward to 2 percent on all purchases if you agree to a rate hike to 20 percent on your balance. If you choose to opt out of that offer, the lender could just keep your current terms and conditions.

Tip

Opting out of cards work best when you already have a FICO score above 720 and you do not expect to need a new line of credit for the foreseeable future. Instead of an opt-out, however, you could transfer your balance to a card with a lower rate or one with a zero percent teaser rate and leave the old account open, but dormant.