What Impact Does Closing a Credit Card Account Have on a FICO Score?

Lenders depend on FICO scores more than any other credit score when evaluating your creditworthiness. Most of your financial transactions that end up on your credit report impact your FICO score in some way. Cancelling a credit card is no exception. While cancelling your credit card account may seem to be a logical step after paying off or transferring the card balance, doing so could damage your FICO scores.

Credit Limit Elimination

Cancelling your credit card eliminates the available credit you have on the card. The FICO scoring formula analyzes the remaining credit you have available on your credit accounts and compares your available credit to the total credit card debt you owe. This is called credit utilization. The lower you credit utilization ratio -- or the lower your debt compared to your credit limits -- the better your FICO score. When you cancel a credit card, you lose the spending limit on that particular card. This increases your credit utilization or debt ratio on your credit accounts and results in your FICO score decreasing. The negative impact on your FICO score is worse if you carry a balance on the card when you close the account.

Aging History

If the payment history associated with the account is positive, having the account appear on your credit report boosts your FICO score. Provided you make regular purchases and payments, your account will remain an updated part of your credit record indefinitely. Closing an account prevents it from being updated on your credit report. The longer an account goes without being updated by the creditor, the less effect it has on your FICO scores. Thus, the benefit your credit rating previously received from a history of timely credit card payments decreases as the account trade line ages.

Account Removal

When you close the credit card account, the Fair Credit Reporting Act's reporting period for removal begins, and the credit bureaus will remove your credit card account from your credit report after seven years. Losing a positive account on your credit report lowers your FICO score. If, however, a history of missed payments made the credit account a negative item on your credit report, losing the account history will benefit your FICO score.

Avoiding Future Damage

Cancelling your credit card to avoid the temptation of using the account could help you prevent credit damage. If you would otherwise charge substantial debt on the card that you couldn't afford to pay, cancelling the account may lower your FICO, but not as much as defaulting on a credit card debt would. A defaulted credit card debt not only results in a charge-off, but can also leave you facing a collection account or legal judgment on your credit report that would cause severe damage to your FICO score.