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Will closing a credit card account impact a FICO® Score?
Yes, but not in the way you might expect. And, while closing an account may be a good strategy for responsible financial health management in some cases, it also may have a negative impact on your FICO® Scores.
FICO® Scores take into consideration something called a “credit utilization ratio”. This ratio or proportion basically looks at your total used credit in relation to your total available credit; the higher this ratio is, the more it can negatively affect your FICO® Scores. This is because, in general, people with higher credit utilization ratios are more likely to default on loans. So, by closing an old or unused card, you are essentially wiping away some of your available credit and thereby increasing your credit utilization ratio.
It’s a bit tricky, so here’s an example:
Say you have three credit cards.
- Credit card 1 has a $500 balance and a $2,000 credit limit.
- Credit card 2 is an unused card with a zero balance and a $3,000 limit.
- Credit card 3 has a $1,500 balance and a $1,500 limit.
In this scenario your credit utilization ratio looks like this:
- Total balances = $2,000 ($500 $1,500)
- Total available credit = $6,500 ($2,000 $1,500)
- Credit utilization ratio = 30% (2,000 divided by 6,500)
Now, if you decide to close credit card 2 because it’s an old card that you never use, your credit utilization ratio looks like this:
- Total balances = $2,000 ($500 + $1,500)
- Total available credit = $3,500 ($2,000 + $1,500)
- Credit utilization ratio = 57% (2,000 divided by 3,500)
You can see that your utilization ratio rose from 30% to 57% by closing the unused credit card.