Closing a credit card can potentially lower your credit score in several ways, with the impact varying based on your overall credit profile. The two primary factors affected are your credit utilization ratio and your average age of accounts.
When you close a card, you lose that card’s credit limit, which increases your overall credit utilization ratio (the percentage of available credit you’re using). Since utilization accounts for approximately 30% of your FICO score, this can cause an immediate drop in your score, especially if the closed card had a high credit limit or you maintain balances on other cards.
- Example: If you have two cards with $5,000 limits each and $2,000 in total debt, your utilization is 20%. If you close one card, that same $2,000 debt now represents 40% utilization, potentially lowering your score.
- Impact severity: Higher for those with few cards or significant balances on other cards
- Recovery time: Immediate if you pay down balances on remaining cards to maintain the same utilization percentage
The second factor is your length of credit history, which accounts for about 15% of your FICO score. Closed accounts in good standing remain on your credit report for 10 years, so the immediate impact on your average age of accounts is minimal. However, after those 10 years, losing that account history could lower your score, especially if it was one of your oldest accounts.
Situations where closing a card makes sense despite potential score impacts include:
- Cards with high annual fees that don’t provide sufficient value
- Cards you struggle to use responsibly, leading to debt problems
- Too many cards to manage effectively
- Concerns about potential fraud on unused cards
If you decide to close a card, minimize the impact by first paying off balances on your remaining cards to keep your utilization low. Consider closing newer cards rather than your oldest accounts, and avoid closing cards right before applying for new credit.