Closing a credit card account might seem like a positive indicator for your credit score, since it reduces the amount of debt you can potentially rack up -- but that's not how the credit bureaus see things. Closing an account has a neutral or negative effect on your FICO score, regardless of whose decision that is.
No Scoring Difference
Credit card companies can close your account for a number of reasons, ranging from inactivity to delinquent bills to problems with other accounts. That can be a rude shock if you find out only when your card gets declined, but as far as your credit score goes, it makes no difference whether the credit card company closes your account or whether you choose to do so yourself. All closed accounts affect your credit score the same way, and only indirectly. The fact that an account has been closed isn't the issue -- it's what that closure does to the numbers that influence your score.
No matter who actually makes the decision to do so, closing a credit card starts the clock on when it vanishes from your record. Negative reports vanish after seven years plus 180 days from the start of the first delinquency. While it might not bother you to have those examples of poor credit usage vanish, it’s not just the negatives that go away. Positive reports on accounts paid as agreed are gone after 10 years, so your years of positive usage of that credit account vanish.
Closing a credit card comes with negatives, regardless of the situation that prompted the closure. It shortens your credit history, particularly if the card is one of your older accounts, and the length of your credit history makes up 15 percent of your credit score. It also raises your utilization rates, since you have less available credit to offset your balances. For example, if you have $3,000 in credit card balances and $10,000 in available credit, your utilization rate is 30 percent. If one of your cards has a $4,000 limit, however, and the issuer cancels the card, your utilization rate increases to 50 percent. Utilization makes up 30 percent of your credit score, so a reduction in available credit negatively affects your number.
Your credit report distinguishes your former accounts as closed by consumer or closed by creditor/grantor. Those words don’t affect your credit score, but they might affect the decision to grant you credit. If the closed account also has a series of delinquencies, lenders likely will assume that was the reason for the account closure. Particularly if you have a number of accounts noted as having been closed by creditors, you might be asked about why that might have happened if a prospective lender conducts a manual review of your credit request.
- Bankrate: Closing Credit Card Dings Credit Score
- MyFico.com: Will Closing a Credit Card Account Help My FICO Score?
- The Wall Street Journal: Cardholders Get Rude Surprise at the Register
- MSN Money: Will Canceling Credit Cards Hurt My Credit Scores?
- Equifax: Credit Tips -- What to Do When an Issuer Closes Your Credit Card
- TransUnion: Closing Bank Accounts and Your Credit Score
- Experian. "What Is a Credit Utilization Rate?" Accessed Sept. 29, 2020.