You probably know that charging up credit cards hurts your credit score. That's because 30 percent of your FICO score, the industry standard, comes from how much debt you have. The proportion of available credit on your credit cards that you use is an important ratio in this category.
Closing out a credit card account with a zero balance reduces that total amount of available credit and can increase the debt-to-limit ratio, which in turn can lower your credit score.
Yet the move doesn't always damage scores or depress them permanently. Recent research conducted by FICO found that, for consumers who saw their available credit reduced during April through October 2009, the median credit score increased from 755 to 757 over the six-month period.
"One of the reasons why they weren't decreasing was that a lot of the lenders seemed to be targeting inactive and lowly utilized cards for these credit line decreases," says Frederic Huynh, principal scientist at FICO.
In other words, low credit card balances can shield your score from damage resulting from unwanted reductions to the credit limit or account closures.
Tip: Read "How closing a credit card affects credit score" for more information on the subject.