Does Closing a Credit Card Account Hurt Your Credit Score?

You may want to close your credit card for any number of reasons, such as wanting to upgrade to a better card, being tired of paying an annual fee, or no longer needing the account.

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There’s nothing wrong with not wanting a credit card, but you should reconsider dropping the account–especially if you’ve been using that card for a while.

Canceling a credit card account does not impact your credit score. Most scoring models will not deduct points simply because you cancel a card; however, closing a card can have other unexpected consequences that can lower your credit score. Therefore, before making the final, irrevocable decision to close an account, it is important to understand what might happen down the road. 

Looking for credit repair in Fort Worth and wondering what a credit repair company can do that you can’t? They know how to leverage rules and regulations to help people restore their credit effectively. There are two essential ways that closing a credit card account affects your credit score:

Increases Your Credit Utilization Ratio

There are different credit scoring models in the market. FICO and VantageScore are the most prominent–30% of your FICO credit score is based on your credit utilization ratio. If your credit account is closed, it could actually affect the utilization ratio and your credit rating.

‘Credit utilization’ is the term used to describe the amount of credit you’re using (or how much you currently owe) divided by the amount of credit you have available (or your credit limit). Your credit score may suffer if your credit report shows a high credit card utilization rate. Daily balances don’t affect your credit score much because the card issuers sum up transactions and send reports once a month, typically at the end of the month. Therefore, the balance and the credit limit on the closing date will reflect your account’s performance.

The interest rate on amounts owed will jump if you miss a payment, and late payments will damage your credit score, too. It is best if you pay as much of the statement balance as possible before it is due to keep your credit utilization ratio low. Suppose your card remains inactive for a while–it doesn’t matter why the account was closed, because if there is no credit to rate, that’s bad news.

Reduces The Length Of Your Credit History

If you do some digging into the topic of credit card closures, you might come across a common warning. Many people think that closing a credit card will make your credit history disappear and that you would have to start all over to establish credit, but it’s not as simple as that. FICO and VantageScore take your credit history’s age into account. 

The average age of multiple accounts of your report can affect your credit score in a significant way. Keep in mind that the length of your credit history accounts for 15% of your FICO Score, and your credit account's depth of credit is responsible for 20% of your VantageScore. If you close an account (credit card or otherwise), FICO scoring models still consider your account’s details when calculating your average credit age. Closed accounts that were kept current are taken into account for up to ten years, whereas delinquent accounts are discarded after seven years. As long as an account doesn’t disappear from your report, its age will be a factor in determining the FICO score.

Credit scores from VantageScore are calculated in a slightly different way. This model usually ignores closed accounts while estimating the credit score of a consumer–as a result, if a potential creditor uses the VantageScore scoring model to calculate your credit score, a credit card closure can negatively affect the score.

Wrapping It Up

There are upsides and downsides to closing a credit card, but the ultimate decision is up to you. If you do end up wanting to close your account, be mindful and strategic about the procedure. Don’t forget to pay off all your remaining debt before parting ways with your credit card if you don’t want to see a drop in that precious three-digit credit rating number.

Looking for more information on whether or not credit scores can be manipulated? Check out our latest article.

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