Canceling your credit card doesn’t just mean it won’t work when you go to swipe it; the cancellation can also bear an impact on your credit score. The biggest impact is likely to come from the adjustment to your credit utilization ratio, which indexes how much of your available credit you’re currently using at any point. In some scoring models, credit usage is considered a very significant factor which can account for nearly a third of your credit score.
Increasing Your Credit Utilization Ratio
Your credit utilization ratio compares the balances on your revolving accounts, like credit cards, against the credit limits of those card accounts. If you use a small portion of your available credit, lenders may see this as a sign that you handle credit responsibly. When you close a card, you’re reducing your available credit. This increases your credit utilization ratio, and can negatively impact your credit score. For example, imagine that you have two cards that each have a $6000 credit limit. If you have a $3000 balance on one and zero on the other, your total credit utilization is 25%–because you’re using $3000 of your total available $12,000. If you were to close the account you’re not using, your credit utilization ratio would jump to 50%, because you’re now using $3000 out of only $6000 now.
Information Remains on Credit Report
If you close a credit card in the hopes that it will remove the negative information associated with that account from your credit report, you may not actually be achieving what you hope to accomplish. According to Experian, the negative information remains on your credit report for the same amount of time even if you subsequently close the account. For example, late payments stay on your credit report for seven years from the original delinquency date. If a payment was late one year ago and you close your account, that late payment still can affect your credit score for another six years—regardless of whether you close the account or not, the delinquency shows on your credit report for the same duration.
Credit Scoring Considerations
Timing matters when it comes to closing credit cards. Experian notes that if you’re planning to apply for credit in the next several months, you may want to consider keeping the credit card open. Having long-standing accounts open is usually considered a good thing for your credit. Plus, according to Experian, paying down debt first on your remaining credit cards is often seen as a responsible credit behavior. Taking care of your credit consists of many different factors, all of which can help show that you’re being seen as responsible when you apply for new credit at a given point.
Credit Score Not the Only Factor
When deciding whether or not to close a credit card, Experian cautions that your credit score shouldn’t be the only factor you consider. If you’re struggling with debt management, keeping the card active may only tempt you to spend more. Closing it can prevent you from racking up additional debt while you work to get out from under water. By avoiding temptation, you can focus on paying down your other cards on time each month, which is often considered an important factor in your payment history. When you check your credit report and score regularly, you’re taking positive steps to be more knowledgeable about your credit, and strengthen your financial well-being.
This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.
Published by permission from ConsumerInfo.com, Inc., an Experian company. © 2014 ConsumerInfo.com, Inc. All rights reserved.