Closing Old Credit Cards: How It Impacts Your Credit Score

Closing an old credit card can feel like a responsible financial move – decluttering your wallet and simplifying your finances. However, when it comes to your credit score, the impact of closing a credit card, especially an older one, isn’t always straightforward and can sometimes be counterintuitive. It’s crucial to understand how this action affects the factors that make up your credit score to make informed decisions.

One of the primary ways closing a credit card can influence your credit score is through your credit utilization ratio. This ratio compares the total amount of credit you’re using to your total available credit. It’s a significant factor in credit scoring, often accounting for around 30% of your score. Imagine your total available credit as a pie. Your credit utilization is the slice of that pie you’re currently using. Lenders prefer to see a smaller slice, generally recommending keeping your utilization below 30%, and ideally even lower, like 10%.

When you close a credit card, you reduce your total available credit – effectively shrinking the size of your pie. If your spending habits remain the same, and you carry balances on other cards, your credit utilization ratio will likely increase. For example, if you have two credit cards, each with a $5,000 limit, giving you $10,000 in total available credit, and you typically carry a $2,000 balance, your utilization is 20% ($2,000/$10,000). If you close one of those $5,000 limit cards, your total available credit drops to $5,000. Now, with the same $2,000 balance, your utilization jumps to 40% ($2,000/$5,000). This higher utilization can negatively impact your credit score.

Another important factor affected by closing old credit cards is the length of your credit history, which makes up about 15% of your credit score. A longer credit history generally signals to lenders that you have more experience managing credit responsibly. The age of your oldest credit account and the average age of all your accounts are key components of this factor. Closing an older credit card, especially if it’s one of your oldest accounts, can potentially shorten your credit history.

Even though you’re closing the account, the closed account doesn’t immediately vanish from your credit report. In fact, closed accounts in good standing remain on your credit report for up to 10 years, and negative information (like late payments) can stay for 7 years. So, the positive payment history from your old card will continue to benefit you for a time. However, the age of that closed account becomes fixed; it will no longer contribute to increasing your average account age as time passes. If the closed card was your oldest account, or one of your oldest, closing it could gradually reduce the average age of your open accounts, potentially having a slight negative impact on your score over time.

It’s important to note that closing a credit card doesn’t erase the positive payment history associated with it. Consistent on-time payments on that card will continue to be a positive factor in your credit history for years to come. Payment history is the most significant factor in your credit score, accounting for around 35%. So, the responsible use you demonstrated on that old card continues to be beneficial.

However, there are situations where closing an old credit card might be less detrimental, or even beneficial in the long run. For instance, if you have a credit card with a high annual fee that you no longer use, the cost of keeping it open might outweigh the potential minor negative impact on your credit score. Similarly, if you are struggling to manage multiple credit lines and are tempted to overspend, closing an unused card could be a responsible step towards better financial control.

In summary, closing old credit cards can potentially have a negative impact on your credit score, primarily through increasing your credit utilization ratio and, to a lesser extent, by potentially shortening your average credit history over time. Before closing an old credit card, especially one with a high credit limit or a long history, carefully consider your credit utilization and the overall impact on your credit profile. If you decide to close a card, prioritize closing newer, less-used cards with lower credit limits first. Remember, responsible credit card management, including keeping utilization low and consistently making on-time payments, is the most crucial factor in maintaining a healthy credit score, regardless of whether you close an old card or not.