Financial Planning for Generation X & Y Women
 
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Expert Q&A Archive

01/05/2010
Does closing your credit card affect your [credit] ratings?
Does closing your credit card affect your [credit] ratings?
Blake Allison:
expert info »
There are a lot of myths about closing credit cards and the impact it has on your credit score. First and foremost, closing a credit card will not increase your credit score. But you have to understand a bit more about how your credit score is calculated to understand why closing a credit card can have a negative impact. If you close a credit card, the information on your credit report will eventually fall off; however, your credit history is one of the components used to calculate your credit score. In other words, you risk not having a complete history for the credit bureaus to 'see' how you have managed your credit over time.

Furthermore, the amount of credit you use relative to the amount of credit available to you is another important part of your credit score calculation. Let's say you have two credit cards, one with a zero balance that you never use with a credit limit of $5000, and a second one with a $2000 balance and a credit limit of $5000. In this situation, you are only using 20% of your available credit ($2000 divided by the sum of $5000 plus $5000); however, if you close the unused card, your credit 'utilization' jumps to 40% ($2000 divided by $5000). This measurement is often considered as important to your credit score as making your payments on time!
Kris Freeberg:
expert info »
Yes, closing your credit card affects your ratings unfavorably. Rating agencies like to see continuous, responsible credit card use, with an ideal usage ratio of about 4%.
Gerri Detweiler:
expert info »
Yes, closing an account affects your credit scores, though the specific amount depends on a number of factors. Generally, the stronger your credit score, the less closing a single account will hurt your credit. If your credit score is strong, closing one account may have little impact, especially over time.
H. David Whalen:
expert info »
Closing out your credit card account may affect your credit rating, especially if you have had the card any length of time. It represents a part of your credit history.
Gail V. Marquet:
expert info »
Cancelling your credit cards after they have been paid off is a good idea. The more credit cards you have open, even if they don't have a balance, affects your credit score. It's called your debt to income ratio. Even if your credit cards have a zero balance, they still have a credit limit. Add all the credit limits together and compare it to your income and you can see where the possibility of maxing out the cards would be very negative against your income.
Bettye J. Banks:
expert info »
Absolutely! It changes your "credit utilization ratio"! Be extremely careful before you make a decision to close your accounts. If it changes your credit utilization ratio so that you only have open accounts with high outstanding balances, it is not a good thing. Your credit utilization ratio should not exceed 50% of your available credit.

For example:
Assume you have three accounts, each with a $5,000 limit.
Account one has an outstanding balance of $5,000 because you have used it up to its maximum. (So far, not good.)
Account 2 has a balance of $2,500 because you have tried to keep it down.
Account 3 has a balance of $0 (GREAT!)

Your total composite available debt is $15,000 (three accounts at $5,000 each.) your total debt on the three is $7,500. This is 50% of the $15,000 available credit, or your credit utilization ratio. Not too bad, but it would be even better to pay down the two accounts having a balance. Anything over 50% is bad. If you decided to close account three, the debt utilization ratio would increase to 75% ($7500 debt divided by $10,000 available credit), way too high!

[Editor's note: You can read more about how closing a credit card account with high available credit impacts your FICO credit score at http://www.myfico.com/crediteducation/Questions/Credit-Cards-And-Score.aspx.]
 

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