A number of factors affect your credit score. Lenders like to see that you maintain low debt balances compared with your credit limit, make on-time payments, pay your balance in full each month and carry a diverse portfolio of credit types, including installment loans (such as home loans, auto loans or student loans) and revolving credit, such as credit cards.
It’s also good for your credit to maintain longstanding, positive relationships with lenders. Items that can negatively impact credit: high debt-to-credit ratios, opening multiple credit cards at once (this creates the impression you’re scrambling for credit), or making late payments often.
Motivation
Closing a credit card account may make sense if you’re already carrying a lot of credit cards and want to downsize the contents of your wallet. Some consumers want the satisfaction of snipping their credit card into ribbons after paying down longstanding debt and want to close the account. You may want to get rid of your first credit card, which could have higher interest rates, lower balance limits and fees associated with consumers new to credit. Maybe you’d like to close a credit card account because its enormous, unused credit limit might seem tempting to identity thieves (or a spouse who is not thrifty). Some consumers open department store credit cards to score promotions and discounts on a big purchase and don’t have further use for the card. These can all be valid reasons for closing a credit card account.
Effects
In some cases, it can hurt your credit score to close a credit card account. If you close your only credit card account, it affects your credit diversity, which damages your score, and if you close your longest held card it reduces the length of time you have used credit, which also hurts your score. It also can damage your credit if the account you’re closing represents a large portion of your unused credit. That’s because credit utilization — the amount of debt you carry relative to your credit limit — affects your credit score. If you use most of your available credit, and, therefore, have a high credit utilization ratio, it negatively impacts your score. By closing an account you are reducing your overall credit limit, and, therefore, raising your credit utilization ratio. If the credit card account is closed because of missed payments or some other unfavorable financial behavior, that hurts your credit score as well. In some cases, closing an account can cost you 10 to 15 points on your credit score, according to Money Under 30.
However, if you’re carrying a lot of credit cards, it leaves an unfavorable impression with credit agencies — especially if several were opened recently or simultaneously, suggesting you are desperate for credit. In this case, it may not harm your credit score to close an account. If excessive fees prevent you from directing funds toward more productive goals — such as paying down debt on another credit card — closing the account may help you improve your credit score over time.
Options
If you don’t want to close the credit card account, you can call the lender and request a lower credit limit if you’re concerned about the temptation to overspend or identity theft. This may hurt your credit utilization ratio, but may help your overall financial situation. If you’re worried that the lender will close the account because of inactivity, you can link a regular monthly payment to the card and pay the balance in full monthly.