When a person decides to close a line of credit with a credit card company, this is known as "canceling" a credit account. When a card is canceled, the person can no longer access the credit previously made available to him under that account. However, he is still liable for paying the debt incurred through use of the card. Closing an account generally lowers a person's credit score.
Credit-to-Debt Ratio
A person's credit score is based on different factors related to her borrowing history. Among these is her current ratio of available credit versus her outstanding debit. The higher this ratio, the higher her score. As this ratio lowers, it means that she has less ability to borrow, causing credit reporting agencies to become more concerned about her defaulting.
Credit History
Closing an older credit card can have a negative effect on a credit score because it shortens a person's credit history from a credit reporting agency's viewpoint. According to the financial reference website, The Motley Fool, one of the main variables used to compute a person's credit score is the length of time he has been taking out credit.
Too Many Accounts
Having too many lines of credit open also can lower a person's credit score. According to the Fair Isaac Corporation (FICA), one of the leading scorers of credit, a person's credit score begins to decline once he has seven or more revolving lines of credit open. However, if he has fewer than that, closing an account will hurt, not help, his score.
Advantage
The only other potential advantage to canceling a credit card account is to prevent additional debt from being drawn against the account. If a person is a compulsive spender, then closing a line of credit may be an effective deterrent to running up more debt. Canceling a credit card also may prevent it from being misplaced and used by an unauthorized user.
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