Why Closing a Credit Card Is Often a Bad Idea

When it comes to credit, sometimes knowing what not to do is just as important and knowing what you should be doing. There are certainly a lot of common credit mistakes which can take a major toll on your credit scores. You probably would not be surprised to read that things like late payments, charge-offs, repossessions and foreclosures can harm your scores. However, it might be a real eye-opener to learn that you could potentially cause serious damage to your credit scores simply by closing an unused credit card account.

Your “Age of Credit”

Some people believe that closing a credit card account could lower your credit scores because doing so will cause you to lose credit for an established, aged account in your credit history. While it is certainly true that credit scoring models like FICO and VantageScore do consider the age of the accounts which show up on your credit reports and even the average age of those accounts combined (the older the better), what is untrue is that you will suddenly “lose credit” for the age of an account once it is closed.

Closed credit cards will remain on your credit reports along with the credit history associated with those accounts, good or bad. Credit scoring models will continue to consider the age of any account as long as it appears on your credit reports. Therefore, a closed account can indeed continue to benefit you in the “Age of Credit” category. It is worth noting, however, that the credit reporting agencies (CRAs) currently have a policy to remove closed accounts from your credit reports after 10 years.

Your Revolving Utilization

The real reason why closing a credit card could be a bad idea for your credit scores is due to the impact which the account closure may have on your revolving utilization ratio. Credit scoring models place a lot of emphasis on the way you manage your credit card accounts. Specifically, they will measure how your credit card balances relate to your credit limits. This relationship between balance and limit is your revolving utilization ratio.

When you close a credit card account, especially an unused credit card, you effectively lower your aggregate credit limit (the credit limits of all of your open credit card accounts combined). By lowering your aggregate credit limit you could inadvertently cause your revolving utilization ratio to rise because your balances didn’t go down at the same pace. If you are not very careful this increase in revolving utilization ratio could damage your scores and in a hurry.

In truth, the impact closing a credit card account could have on your credit scores is going to vary from person to person and from credit report to credit report. It is technically possible to close a credit card account without causing any immediate damage to your credit scores. However, in order to achieve this you would need to make sure that all of your other credit card accounts are reporting $0 balances on your credit reports so that your revolving utilization ratio would not spike due to the closure of an unused credit card account. Or, if you closed a card with a $1,000 credit limit then you’d need to pay off $1,000 of your credit card debt at the same time so the closure becomes a net zero transaction.