Is It Better for Your Credit Score to Close Accounts?

Closing unused credit card or loan accounts may seem like a good idea to simplify your finances However, this can actually hurt your credit score Here’s an in-depth look at how closing accounts affects your credit and when it might make sense to close them.

How Closing Accounts Impacts Your Credit Score

The major factors that make up your FICO or VantageScore credit scores include

• Payment history
• Credit utilization
• Age of credit history
• New credit accounts
• Credit mix

Closing an old credit card or loan account can negatively impact several of these key factors:

Credit utilization – This measures how much of your total available credit you are using. The lower your utilization, the better for your scores. When you close an account, you lower your overall credit limit which can increase your utilization.

Age of credit history – The average age of your accounts is factored in. Older accounts help raise your average account age. Closing a long-held account can decrease your average age.

New credit – Opening and closing accounts in a short period of time can signal risk to lenders. Closing an account may be counted similarly to opening a new account.

Generally, as long as you have low utilization across your other credit accounts, closing one account should cause only a small drop in your scores if any at all. However, if closing the account significantly alters these key scoring factors, you may see a larger hit to your credit scores.

How Account Status Affects Scoring

When you close a credit card, the account will show up on your credit reports as “closed at consumer’s request” or something similar. For credit scoring purposes, there is a difference between an account that is closed in good standing versus one that was shut down for non-payment or maxing out the limit.

An account closed in good standing will continue contributing positively to your age of credit history for about 10 years after being closed. On the other hand, if the account was closed by the lender for negative reasons, it will stop helping your credit scores immediately.

When Closing Accounts Could Help Your Scores

In some cases, closing an account may actually help credit scores:

• If closing the account gets rid of your only credit card with a high balance, your credit utilization will decrease which can boost scores. Just be sure you aren’t losing a significant portion of your available credit.

• If you have an account in collections or that you are no longer using, closing it prevents any further damage from that account. The negative status won’t disappear right away though.

• If you have a very new credit account, closing it quickly may help by avoiding a “short term credit” penalty that sometimes occurs with new accounts closed soon after opening.

• If you have an account with an annual fee you no longer want to pay, closing it will avoid fees and free up money to pay down balances on other credit accounts.

Tips for Closing Accounts the Right Way

If you’ve determined it makes sense to close a credit account, here are some tips for doing it properly:

• First, pay off any balance on the account if possible. Closing an account with a balance can accelerate interest charges in some cases.

• Contact your credit card issuer or lender directly to close the account. This avoids having the account incorrectly reported as delinquent.

• Make sure to destroy any physical credit cards by cutting them up and disposing of the pieces securely.

• Update any billing services using automatic payments tied to the account before it is closed.

• Consider timing – try to avoid closing accounts right before a major credit application like a mortgage, auto loan or apartment rental.

• Evaluate the impact on your credit first. Closing an unused card with a large credit limit may hurt your scores more than a lower limit card.

• You can typically re-open a closed credit card later on if needed, as long as the account was in good standing when closed.

Alternatives to Closing Accounts

Rather than closing your credit card accounts, you may want to consider these other options:

• Product change – Many credit card companies will let you convert your existing card to a different product, allowing you to keep your history.

• Ask for a lower limit – Reducing your credit limit on an old card helps your utilization without losing your credit history.

• Let fees post, then call – If an account has an annual fee, you can allow the fee to post, then call and close within 30 days to reverse it.

• Use sparingly – You can keep accounts open but inactive by making a small purchase every 6-12 months. Set a reminder on your calendar to avoid inactivity closure.

• Freeze card – Literally put your card in a block of ice in your freezer so it can’t be used impulsively while keeping it open.

When Does Closing Accounts Make Sense?

Here are some good reasons why you may want to close a credit card or loan account:

• You have multiple cards and want to consolidate spending to one primary card. Close newest and least-used accounts first.

• The account has expensive annual fees you no longer want to pay.

• You co-signed on an account for someone else who now has established their own credit history.

• You have accumulated credit cards over the years and simply have more than you need or can manage responsibly.

• The account has a very low credit limit compared to your other cards, so closing it won’t impact utilization much.

• The account was opened recently and has little credit history, so closing it quickly won’t hurt.

Just be sure to evaluate the impact closing the account could have on your credit based on the various factors discussed. Ideally, avoid closing your oldest credit accounts with large limits, as this can take the biggest toll on your credit scores.

The Bottom Line

Closing an old credit account can potentially hurt your credit scores, especially if you don’t have a lot of other credit history. However, the impact is usually relatively small as long as you maintain low balances on your other accounts. With proper planning, you can minimize any temporary score drop when closing accounts you no longer want or need.