How much will my credit score lower if I close a credit card?

The Credit Card Closing Conundrum: How Much Will It Ding Your Score?

So, you’re thinking of tidying up your wallet and closing a credit card. Maybe you’re streamlining your finances, cutting back on temptation, or simply tired of an annual fee. Whatever the reason, it’s a smart move to consider the impact closing that card will have on your credit score. The truth is, it’s not a straightforward “yes” or “no” answer; the effect can vary significantly depending on your individual credit profile.

The Age-Old Question: How Age Affects Your Score

One of the most significant factors at play is the age of the credit card you’re contemplating closing. Think of your credit history as a tree. The older the tree, the stronger its roots. In this analogy, older credit accounts demonstrate a longer history of responsible credit management. Closing a long-standing card, especially one of your oldest, effectively chops off a branch of that tree, potentially shortening your overall credit history.

This is particularly important because credit history length accounts for approximately 15% of your FICO score. If that card represents a substantial portion of your credit history, closing it could lead to a noticeable dip in your score. The shorter your overall credit history, the more pronounced this impact will be.

The Utilization Rate Riddle: How Available Credit Matters

Another crucial consideration is your credit utilization rate. This is the percentage of your available credit that you’re actually using. It’s calculated by dividing your total outstanding balances by your total credit limit across all your cards.

Let’s say you have two credit cards:

• Card A: $5,000 limit, $1,000 balance
• Card B: $2,000 limit, $500 balance

Your total available credit is $7,000, and your total balance is $1,500. Your credit utilization is $1,500 / $7,000 = 21.4%.

Now, imagine you close Card B. Your total available credit drops to $5,000. Your utilization rate suddenly jumps to $1,500 / $5,000 = 30%.

Credit utilization accounts for a significant 30% of your FICO score. A higher utilization rate signals to lenders that you’re more reliant on credit, potentially increasing your risk. Closing a card that contributes a significant portion to your total credit limit can, therefore, bump up your utilization and negatively affect your score.

The Good News: It’s Not All Doom and Gloom

While closing a credit card can lower your score, it’s not always a devastating blow. The impact is lessened if:

• You have a long and established credit history with other active accounts.
• The card you’re closing isn’t one of your oldest.
• You maintain a low credit utilization rate across your remaining accounts.
• You have a high credit score already. The higher you are, the less likely a small change will push you down a tier.

The Golden Rule: Pay Down Balances First!

Regardless of your decision to close a credit card, the most crucial step is to prioritize paying down outstanding balances across all your accounts. This improves your credit utilization rate and demonstrates responsible credit management, which ultimately benefits your financial health and your credit score.

The Takeaway:

Closing a credit card is a decision that requires careful consideration. Understand the potential impact on your credit history length and utilization rate. While it might cause a temporary dip, strategic planning and responsible credit management can minimize any negative effects. Before you snip that card in half, assess your overall credit profile and ensure you’re prioritizing a healthy financial foundation. Don’t let a closed account derail your credit goals – focus on building and maintaining a strong credit history through responsible borrowing and timely payments.

#Creditcards #Creditscore #Debtmanagement