When I was younger, I tried to close my unused credit card accounts to boost my credit score. I never carried a balance, but I thought if I had too many credit cards, I wouldn’t be eligible for new lines of credit. Years later, I discovered this belief was misguided, and that the truth was far more complicated.
To understand how closing a credit card account can hurt your credit score, it helps to know how the score is calculated. Companies used to review your credit history to determine your creditworthiness, and then decide whether or not to grant you a line of credit. Today, the credit bureaus have boiled your credit history down to a single number, the credit score.
Your Credit Score’s Composition
This score is comprised of many factors:
- The most important factor is your past payment history, which comprises 35% of your total credit score.
- The amount of your outstanding debt makes up 30% of your credit score.
- The length of your credit history makes up 15% of your credit score.
- The remaining 20% is divided evenly between new credit, and the types of credit accounts you have.
Closing a Credit Card Impacts Your Credit Score
When you close a credit card, you reduce the average age of all of your accounts, so closing old accounts hurts your credit score. Closing a credit card account and incurring more debt have the same negative impact on your credit score.
Closing an account also affects your credit utilization ratio. The credit utilization ratio is the percentage of available credit that you are actually using. For example, if you have a credit card with a limit of $5,000 and you have a balance of $2,500 on the card, your credit utilization is 50%. A higher ratio negatively impacts your credit score.
When and How to Close an Account
Having many accounts open actually helps your credit score, so you don’t need to systematically close unused accounts. In fact, many credit advisors recommend having four to six open credit card accounts.
If you must cancel some of your cards, use these tips to close your accounts:
1. Only Close New Accounts
When you have to close a credit card account, don’t close your oldest credit card. The account with the most payment and usage history should remain open, if at all possible. Focus on closing new accounts, instead.
2. Cancel Cards with an Annual Fee
Don’t keep unused credit cards that charge annual fees, but wait until fees are due before canceling any credit cards. Call the credit card companies and request that the fees be waived. You can also ask that accounts be switched to similar cards, with no annual fees. However, make sure that the credit card company does not close your account and re-open a new one, as this defeats the purpose of retaining the account for your credit history.