Can Closing a Credit Card Negatively Affect Your Credit Score?

Your credit score is a three-digit number determined by the Fair Isaac Corporation (FICO). FICO uses a somewhat complicated formula to calculate your score that takes into account such factors as your payment history, the amount you owe and the types of credit accounts you have. In many cases, canceling a credit card could actually cause your FICO score to drop.

Increased Utilization Rate

One way closing a credit card could lower your credit score is by increasing the amount of used credit in relation to available credit, which is known as your credit utilization ratio. For instance, suppose you own two cards with a credit limit of $15,000 each for a total of $30,000, and your total outstanding balance due is $9,000. In this case, you have used 30 percent of your available credit. If you cancel one of the cards, your utilization ratio would increase to 60 percent, which will likely cause an increase in your FICO score.

Canceling Older Cards

Canceling a credit card you've owned for several years can also adversely impact your credit, as it can shorten your credit history. Generally, the longer you've had an account and continued to make timely payments, the more canceling it could negatively impact your credit score. If you feel you must cancel one or more credit cards, it's better to cancel your newer ones first.

Considerations

While canceling a credit card can lower your score, there are some situations where the impact can be minimal. According to the credit reporting agency Experian, if your credit score is strong, typically in the 700s, having your score drop a few points by closing a credit card account with no outstanding balance shouldn't limit your ability to obtain credit in the future or impact the low interest rates for which you should qualify.

Alternative

Instead of canceling credit cards where you carry an outstanding balance, a better strategy can be to keep them active while focusing on paying down the balances. Your credit utilization ratio will improve, which could actually help raise your FICO score over time. If you feel you'll be tempted to use the cards, you could store them in a place where they're hard to get to or give them to a trusted family member to hold. To eliminate any chance of using them again, you could even cut them up without canceling the account. You can always get a replacement card when your debt is under control.