How Do Closed Accounts Affect My Credit?

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So you’ve finally decided to take charge of your credit and close those credit cards gathering dust in your desk drawer. But wait — will closing those accounts mess with your score?

As it turns out, they will. Closing a credit card account can take a chunk out of your score, shortening your credit history and reducing your available credit.

Here’s how it all works.

Credit History Matters

Clearing old or unused accounts to help streamline your finances and protect those accounts from fraud may sound like a smart idea. But it’s important to know that once an account is closed, you’ll lose the credit history associated with it in about 10 years.

Long-held accounts, like a credit card with a history of on-time payments, could be something you want to keep on your report indefinitely, since having a positive payment track record is one of the key factors creditors use to determine whether or not you’re a credit risk.

Plus, credit history, in general, accounts for about 15% of a FICO score. (You can read up on FICO scores here.) So, if maintaining or improving your credit score is your top priority, it could be better to leave the old credit card open and allow your score to rise over time.

Credit Utilization Is Key

Revolving utilization refers to the amount of your credit card limits that you’re currently using. For example, if you carry a $2,000 balance on a travel rewards card with a $10,000 limit, you’re using 20% of your credit line.

This measurement, also called your debt-to-limit-ratio or credit utilization, makes up 30% of your credit score. It measures each of your credit card accounts individually, as well as the total limits and balances of all your revolving accounts on your credit report. This is why it’s a good idea to keep a low balance on your cards, even those with a cushy credit limit.

If you’re considering closing a card but aren’t sure where your credit stands, it may be time to check your credit. You can view two of your credit scores for free each month on Credit.com.

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Will It Hurt My Credit If I Don’t Use My Credit Cards?

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There are plenty of reasons why you may have wound up with a lot of credit cards in your wallet. Maybe a rewards program changed over time. Maybe your credit improved and qualified you for better offers. Maybe a sign-up bonus was too good to pass on. Maybe you opened and used too many cards straight out of college, but have since learned the errors of your ways.

Whatever the case, if you have a lot of credit cards, cleaning out your wallet can be easier said than done. Officially, closing a credit card could wind up hurting your credit score, and besides, that old hotel rewards credit card sure does come in handy when it’s time to plan your family vacation each year. So, you keep the cards in there but just don’t charge anything to them.

No harm, no foul, right? Until you notice that your credit score isn’t as high as you thought it would be. Is it possible you’ve reached a credit limit tipping point, even if you’re using your cards responsibly? Could all that unused available credit be holding you back?

Under the Limit

Credit utilization — how much debt you are carrying versus how much total available credit has been extended to you — is a major component of credit scoring models. For the best credit scoring results, it’s generally recommended to keep the amount you owe below at least 30% and ideally 10% of individual and collective credit limits. Anything over that threshold could lower your credit score.

Now, there’s an outside chance having too much available credit could ding your score down the road. The idea here being that, while those open, unused credit limits aren’t getting you into any trouble now, they could allow you to overextend yourself in the future.

But penalties for having too much available credit have grown less and less common in recent years, said Rod Griffin, director of public education for Experian.

“Credit scoring systems have evolved as consumer behavior has changed, and generally it is now a less important factor in credit scoring,” he wrote in an email. “Available credit is a factor in credit scores, but when it comes to revolving accounts, it is far less important than your utilization rate. So, today, having open accounts with zero balance is more likely going to help your credit scores, not hurt them.”

 

Brushing Up Your Scores

That’s not a guarantee, however, that all of your available credit isn’t hurting your score. To get a better idea of what may be bringing your score down, you’ll need to check your credit. (You can get a free credit report summary every month on Credit.com to see the major factors impacting your scores.)

If you do learn that having too much credit is one of your risk factors, you could consider closing a credit card that you never use. This may hurt your score in the short term, depending on what kinds of balances you are carrying on other cards, but, so long as your utilization gets back in line, it should rebound over time.

Remember, you don’t need to carry a balance on a credit card to build credit. But, if all these nuances have your head spinning, you can generally establish or improve your credit in the long term by paying all of your bills on time, keeping debts low and adding new financing only as your wallet and score can afford it.

And, if your score is in rough shape, you can generally fix your credit by disputing any inaccuracies (you can read more on how to dispute errors on your credit report here), identifying your credit score killers and coming up with a game plan to address them.

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