Does Closing One Card & Opening Another Hurt Your Credit?

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Your credit score -- typically the FICO score, although there are others -- plays a big role when you make major purchases. If you want the best rate on your car loan or a mortgage, you need a good credit score. FICO scores are between 300 and 850, and people with scores above 760 usually receive the best rates, according to Tara Siegel Bernard, personal finance reporter for The New York Times. Your score can drop when you open a new credit card or close an account you've had for a while.

What Opening an Account Does

Five pieces of information on your credit report play a role in your score. New credit accounts, such as a new credit card or two, make up about 10 percent of your score, according to the MyFICO website. When you open a new card, the company makes an inquiry into your credit, which can lower your credit score a bit, especially if you apply for several new cards at the same time. Opening several new accounts at the same time can be a red flag to some lenders.

What Closing an Account Does

After you pay off a credit card account, you might be tempted to shut it down completely to celebrate getting out of debt. However, closing an account can drop your score, particularly if you close an account with a high spending limit. Your credit utilization ratio, or how much debt you carry compared to your spending limits, plays a part in figuring out your score. If you have three credit cards that each have a $5,000 spending limit and have a balance of $1,200 total, your ratio is less than 10 percent. However, if you cancel one card, your overall spending limit drops to $10,000 and your ratio jumps to more than 10 percent, which can lower your score.

Your Credit History

Your credit history also plays a role in your credit score. Having a long history of credit is a good thing that bumps up your score. That doesn't mean that shutting down an older credit card and opening a new one will reduce the length of your credit history. Your old, closed accounts still appear on your report and still play a role in figuring out your score. Although negative information drops off your report after seven years, good information, even from a closed account, sticks around for longer.

Improve Your Score

Closing an account that you've had trouble paying and opening a new one isn't an effective way to wipe the slate clean. The old account stays on your credit history for at least seven years. Your payment history makes up the bulk of your FICO score, so your best bet is not to worry so much about opening and closing accounts but rather to pay the ones you have open on time.