When Closing a Credit Card Can Hurt Your Credit Score

You’ve probably heard of your FICO credit score—the three-digit number that lenders use to determine qualification and interest rates. The Fair Issac Co. that developed the score has published a list of the primary factors that influence your credit score, but many consumers still wonder how canceling credit cards or opening new ones will impact their scores. In this post, we’ll give you the answers to these questions as provided by a FICO representative.

1. If I close low-credit limit credit cards (less than $5,000) that I never use, will that hurt or help my credit score if I have two or three other higher-limit accounts? Let’s start with some common misconceptions about the FICO score. For one, it’s not true that you are penalized for having too much credit. As far as FICO is concerned, there is no such thing as too much credit. It’s debt that you have to worry about. Secondly, once you close an account, you do not lose that account’s history. So, to answer the question, whether you’ll hurt your score by closing an account depends on how much you owe on your accounts. Closing an account on which you owe nothing while keeping other high-balance cards open will raise your balances-to-limits ratio, which will hurt your FICO score.
2. As far as your credit score is concerned, is there ever a valid reason to close a credit card? No, closing an account will always have a negative impact on your score. Aside from reducing your credit capacity, closing a credit card can also hurt your score by purging a good payment history from your credit report. Closed accounts usually stay on your credit report for ten years, after which they are erased. Open accounts, even if they are inactive, can stay on your report for up to 20 years. Thus, if you delete a credit card on which you have a good payment history, your credit report will eventually show no record of this in the long run.
3. Does it affect your score in different ways when the credit card issuer cancels the account as opposed to the cardholder? No, there is not a difference. Your credit report will indicate that the account was “closed by consumer” or “closed by creditor,” but it makes no difference with your FICO score.
4. Does it impact your score differently if you close a department store credit card instead of a bank credit card? No, they will both have the same effect on your score. The only way this would make a difference is if you canceled all of your bank credit cards and had only department store credit cards left. In that case, this would affect your credit mix, which accounts for 10% of your score. For most people, though, this has such a small impact that it really wouldn’t matter.