Do or Don’t? Closing a Credit Card

To close or not to close? You are likely to hear ranging opinions over this age-old credit card debate. Some say it will ruin your credit, while others advise to close accounts you don’t use to avoid temptation.

Credit scores and the way they are calculated can be confusing, so it’s important to know how your actions affect your score before you take them. Only then can you decide whether closing an account will help – or hurt – your score.

Effect on Credit History

Length of credit history is one of the five categories that FICO uses to evaluate your score. Contrary to popular belief, closing a card doesn’t immediately shorten your credit history length. Closed accounts actually stay on your report for many years—10 years for accounts in good standing, seven years for those that aren’t. Even when it’s displayed as “closed” on your report, those accounts will be there and continue to increase in age. Bottom line – closing an account will affect your credit history length—just not as immediately as many think.

Effect on Credit Utilization Ratio

The most significant effect on your credit score from closing a card will likely come from a spike in your credit utilization ratio. This ratio compares how much credit you’re using with the amount of credit you have available – and plays a large role in your credit score. Closing an account eliminates all the available credit you had on that account. Losing that credit will make your credit utilization ratio less favorable – creditors like to see a credit utilization ratio around 30 percent. Before closing an account, take a look at your credit utilization ratio and see if you can afford to close that particular credit card account.

When not to close a card:

• You’re carrying a balance on the card, unless it’s a last resort to avoid more debt.
• If you just closed another card.
• You’re about to apply for a loan.
• The card represents almost all of your credit.

When to close a card:

• Annual fees are charged and you don’t use it.
• You want to be done with debt.
• You’re splitting from a joint account owner.
• Your account is a victim of fraud.