Editorial Policy

Closing a Credit Card Doesn't Always Hurt Scores

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By Eva Norlyk Smith Ph.D.
April 22, 2013

QDear Eva,

I know the golden rule is you don't cancel your oldest credit card, but if you do, is there a way to minimize the damage? I've had my card for a little over five years. It's a travel rewards card, and it has an annual fee of $95. I got it when I was traveling a lot for work, but I don't do that anymore, and I'm not really collecting or using miles. I don't have any other credit cards, but I would sign up for one to help my credit. Just wanted to get your advice about how I can close that old card and keep my credit good. I'm in the mid-700s now. — Kara

AHi Kara,

You're right. Paying $95 a year for a rewards card you don't use makes little sense. And I've got some good news: Because you're not carrying credit card balances on other cards, closing the card likely won't affect your credit score much, if at all.Ask Eva

To understand the impact (or lack thereof) on your score, let's take a look at how closing a credit card account can affect FICO scores. The most direct effect concerns the length of a person's credit history. Length of credit history accounts for 15 percent of FICO scores, and if you close the card you've had the longest, the credit history component of your FICO score would be shortened, and that could hurt your score somewhat.

The other way closing a credit card can affect scores is more substantial. For people carrying balances over several credit cards, closing a card would increase the credit utilization ratio. Also known as debt-to-credit ratio, credit utilization is a measure of the total amount owed on credit cards in relation to the total credit available. If the amount available goes down (when you cancel a card, for example), your utilization will go up if you still have balances on other cards. This is a much weightier part of FICO scores, as credit utilization accounts for 30 percent of scores.

Because you don't have any outstanding credit card balances, this doesn't really affect you. And because credit history is a fairly small part of FICO scores at only 15 percent, closing the card shouldn't have much of an effect. Also, the payment records of cards closed in good standing stay on your report for 10 years, so it's not like the benefits of your past credit use get wiped out when you close the card.

In short, your main concern should not be about how closing the card would affect your score, but rather how having no credit card at all would impact your score long term. A study by the Consumer Financial Protection Bureau showed that consumer credit card use accounts for half or more of the credit information collected by the credit rating agencies. In other words, credit cards are a significant part of building a solid long-term credit history, and as far as your credit score is concerned, you'd be unnecessarily disadvantaging yourself by not having an actively used credit card.

There is an easy fix for this issue. As you note yourself, you can simply apply for another credit card without an annual fee. Or call the issuer of your current card and ask if it can switch your card over to one of a no-annual-fee card. Your good behavior in the past might make the issuer eager to keep you as a customer.

To build an even better score, you should think about taking out at least another form of credit to boost your score even further. Credit scores also reward consumers who show they can juggle multiple credit accounts, such as an installment loan (i.e. car loans, a bank loan or short-term financing of a new appliance or furniture). And credit cards left in drawers don't really have the same benefit as cards used actively, so for best effect, be sure to make a charge on each card at least every couple months. With these simple steps, you can enjoy the benefits that come with excellent credit scoresfor the rest of your life.

Got a question for Eva? Send her an email.