Closing a credit card account you're not using may seem logical but from a scoring perspective, “[t]here really is never any good reason to close an account," according to the independent consumer information website Bankrate.com. Understanding how credit card usage affects the five main factors that comprise a FICO (Fair Isaac Corporation) credit score can help you decide whether to close or maintain credit accounts.
The total balance-to-limit ratio of all your credit cards combined affects your credit score. If your total credit limit equals $3,000 and you have outstanding balances of $1,500, you have a “revolving utilization” of 50 percent. If you close a card with a $1,000 limit, your total available credit drops to $2,000 and your revolving utilization rises to 75 percent. Because the amount owed versus available credit accounts for 30 percent of your credit score, according to Bankrate.com, keeping the card open would be more beneficial than closing it. However, consumers with significant available unused credit are considered a higher risk, and a high debt-to-income ratio will negatively impact your score.
Length of credit history accounts for 15 percent of a credit score. Once you close a card, it remains on your credit report only up to 10 years, while an open account can stay on for 20 years or more. The independent consumer information website Credit.com recommends making an inexpensive purchase every few months and paying it off in full the next month so the credit card company doesn't close your account.
As long as an account still shows on a credit report, which it can for up to 10 years after closing, the history will show on the report. Closing a card will not remove negative payment history. Working on paying down a card while keeping it open (so the paid-down credit is considered available) is a better strategy for improving your credit score than closing the card altogether.
Types of Credit Used
Although bank-issued credit cards count for more in a credit score, according to Bankrate, closing a department store card over a bank-issued credit card minimally impacts your score. The exception is a department store card that has been in good standing for years or contributes a significant amount to overall limits, in which case closing it may impact your score more negatively than closing a more recently opened or low-balance bank-issued card.
You may have personal reasons for wanting to close a card. Consider first whether or not you plan to make any major purchases, like a car or house, for which you would need a solid credit score. Additionally, not using credit of some type will leave you with no credit score, making it difficult to secure loans due to a lack of solid credit history, according to Credit.com.