A common question I get in workshops is, “Will it hurt my credit score if I close one of my credit card accounts?” The answer is “maybe.” But the reasons why or why not may surprise you.
It is commonly thought that, especially when it comes to a card you’ve had for a long time, you should not close the account. That’s because credit history counts for about 15 percent of your credit score. Close the account, the thinking goes, and you’ll erase some valuable history. But not so fast. According to a helpful story on Money Magazine’s More Money blog, closing an account will not wipe out the account’s history. A spokesperson for Fair Isaac Corporation, the organization that determines your credit score, explained that after you close an account the credit agencies continue to maintain positive information about the account for about ten years and negative information for about seven years.
However, there is a way that canceling a card may hurt you. It has to do with what’s known as credit utilization. That’s the percentage of available credit you are using at any given time. A lower credit utilization works to your favor. By closing an account, you will lower your total available credit, which will likely leave you with a higher credit utilization. If you only use five percent of your available credit at any given time and closing an account will push that to ten percent, you probably don’t have anything to worry about. Using 10 percent or less of your available credit is ideal; 30 percent is usually seen as okay.
So, when thinking about closing an account, you don’t need to worry about its impact on your credit history. But you should give some thought to its impact on your credit utilization.