Will closing a lesser-used low-limit account help or hurt your score -- that depends, and it depends mostly on how much you owe in relation to your limits on all of your accounts. For example, one of the most heavily weighted factors in the scoring -- and this accounts for about 30 percent of the score -- looks basically at your ratio of balances-to-limits on your credit cards. This is the area we call "amounts owed," if you're familiar with the five areas that the score considers. What's most important in terms of the scoring is credit card debt versus installment debt, such as mortgage or auto loans.
To answer this, it really depends on how much you owe on those accounts. If you close an account, and you don't owe anything on it, that account will no longer be included in that calculation that looks at your balances to limits on your credit cards.
So, is there ever any reason to close a credit card, from a credit score perspective?
Not from a scoring perspective, no. There really is never any good reason to close an account. I don't get to say that about too many things that have to do with scoring because usually you're going to hear a lot of "it varies" -- because it does. I can tell you one other way that closing an account can hurt your score: Once it's paid off, that account will be on your credit report for no more than 10 years.
|What makes up your credit score?|
An account that is open with a good history can stay on forever -- it could stay on for 20 years. The bureaus will automatically remove (a closed account) in 10 years, but that could be removed sooner if that credit card issuer decides to remove it. Once it's closed and paid off, that account then becomes inactive, and it's not uncommon for the credit card issuer after a few years or even sooner to just delete that completely, just purge it from their records.
In the short run, you maintain that history. But once that comes off your credit report, you lose that good history. One of those five areas that the score considers looks at how long you've had credit -- that accounts for about 15 percent of the score. That may or may not impact your score a lot depending on your other accounts. If you've only got a few accounts, that could impact it heavily; if you've got a lot of credit for a long period of time, that will probably not impact it by much, if at all.
Is there a difference between the issuer canceling the card versus you closing it yourself?
Good question. That would be a good No. 3 for the misconceptions. No, there is no difference at all. That's a good one.
Even though on the credit report it will indicate "closed by consumer" or "closed by creditor," the score only cares whether it's closed or open, but not by whom, even though it will say so on the report.