Closing credit card dings credit score

Most savvy consumers know about the FICO score -- the three-digit number that companies use to determine interest rates. Even though FICO has published the main factors that affect FICO credit scores, many still wonder what will happen to their credit scores if they cancel credit cards or sign up for new ones.

With no clear-cut answers as to how specific actions impact a score, consumers must resort to trial-and-error credit management, or they do nothing for fear of making any changes that might damage their credit ratings.

We decided to touch base with readers to see what they wanted to know about FICO scores. From the responses to our newsletter call for questions, we learned that many people wondered about the impact of closing credit cards and keeping inactive cards, as well as improving their scores and re-establishing credit.

We posed five reader questions to FICO product support manager Barry Paperno, who has worked for the credit-score keeper since 1995. Here he talks about the ins and outs of closing credit card accounts. (His discussion of the effects of foreclosure and how to build a good credit score will be reported in an upcoming article.)

Credit scoring misconceptions A FICO expert discusses popular misunderstandings about closing accounts and department-store cards versus bank credit cards.

5 questions for Fair Isaac expert 1. Will closing inactive cards hurt? 2. Is there ever a reason to close a card? 3. Does it matter if you or the card issuer closes the account? 4. Is there any difference in cancelling a store card versus a major credit card? 5. If a store card is your oldest card and you cancel it, will it hurt you more?

Will closing lesser-used low-credit limit (less than $5,000) credit cards or lines of credit harm or help our overall credit scores, given two or three other higher-limit accounts?

I'm going to start by providing a couple of misconceptions that I hear regularly with regard to closing accounts. No. 1, that the FICO score penalizes you for having too much available credit, and No. 2, that if you close an account, you lose all the history associated with that account.

It's just not true that you can have too much available credit. That by itself is never a negative with the score. Sometimes the things you do to get too much can be a problem, such as opening a bunch of new accounts, but for the most part, that's just kind of an old wives' tale.

In terms of eliminating the history, the short answer is, that no, it does not eliminate the history. You can have a closed account, an account you haven't used for years, and if it's still on your credit report, if that account is 20 years old, you're getting credit for having 20 years of history for that account. As long as it's on the report, you get credit for the history.