Will Canceling a Credit Card Lower My Credit Score?

Any time you open a credit card, how you treat that line of credit will affect your credit score. If you decide to cancel a credit card, different factors come into play regarding whether your score is lowered. By educating yourself, you can make good decisions about how best to safeguard your credit score.

How Credit Scores Work

Your FICO credit score is what most creditors refer to when inquiring about your credit history and habits. Thirty-five percent of this score is composed of your credit history itself, and whether you show a record of paying your bills on time. Thirty percent comes from your debt-to-credit utilization ratio, or how much available credit you have vs. how much of it you're currently using. Fifteen percent comes from the length of your credit history. Ten percent comes from how many accounts you've opened recently, as well as how many recent inquiries about your credit history have been made. The final 10 percent comes from your total overall number of accounts, as well as what types of accounts are included. Car loans and mortgages are different from student loans or credit cards, and having a mix of types of credit is ideal for a good score.

Misconceptions

According to Craig Watts, spokesman for Fair Isaac Corporation, the company that issues FICO scores, canceling credit cards or other accounts does not remove them completely from your credit history. Remember, the bulk of your credit score is determined by how faithfully you paid your bills every month. If you were consistently on time with your credit card payments, that's what matters for this portion of your score -- not whether the account is still open and active. Additionally, Watts advises that a canceled credit card's effect on the 15 percent of your score determined by credit history length is negligible, and won't appear until several years after the fact.

Debt-to-Credit Utilization Ratio

The area where you need to be careful is in your debt-to-credit utilization ratio. Say you currently have two credit cards with $1,000 balances. You pay the balance of one in full every month, but have a $500 balance on the other that you pay on time, but haven't yet paid in full. This means that you currently have a 25 percent debt-to-credit utilization ratio on those two cards. However, if you close the card that you carry a zero balance on, that ratio jumps to 50 percent. Such a steep jump can lower your score by a few points -- exactly how many will vary by situation.

Other Considerations

According to Watts, anywhere from 700 points and above is considered a very good credit score. If your credit score is currently in this bracket and you opt to close a credit card that negatively affects your debt-to-credit utilization ratio, it will still cost you points. However, if your credit score is this good, a slight lowering will likely not hurt you in any practical way. If you have a lower credit score, the impact may be more significant, but is probably less so than you might think.