Will Closing Old Cards Hurt My Credit Score?

Dear Credit Card Adviser,

My wife and I are trying to close out our credit cards. One of the issuers is advising me that closing the card could lower our credit score. Is this true? We have other credit cards that we are using. We have not been using this card but have had it the longest.

-Andrew

Dear Andrew,

Your issuer is not, technically, leading you astray. Closing out credit cards can lower your score.

First and foremost, you could end up hurting your credit utilization rate -- essentially the amount of credit a lender has extended to you versus how much debt you're currently carrying on your cards. Closing an account eliminates the available credit line associated with it. So, if the card in question has a high credit limit, its closure could send your utilization rate soaring -- a big red flag among credit-scoring models like VantageScore and FICO.

"You have to look at the utilization amount on your other credit cards," says Sarah Davies, senior vice president of product management and analytics for VantageScore. If you're close to maxing them out, it may be worthwhile to keep the card open, at least until you've paid down the balances.

"Most people say keep (your credit utilization) under 30%," says Maxine Sweet, vice president of public education for credit bureau Experian.

So, for example, let's say you have $10,000 in total credit available to you, but the card you want to close features a $5,000 credit limit and you're carrying $2,500 in debt on your other cards. Eliminating that $5,000 credit limit would result in a very high utilization (50%), which, in turn, would hurt your score. (Note that your credit utilization before you eliminated the card's credit limit was below that 30% marker.)

There's also a chance the account closure could lower the age of your credit report, though you're not likely to see any adverse impact on your score right away. Closed accounts stay on a credit report for a significant amount of time. Experian, for instance, keeps those in good standing on its reports for 10 years following a closure, while those not in good standing remain on a report for seven years. Credit bureau counterparts Equifax and TransUnion follow the same parameters.

By the time these accounts actually do disappear from record, you're likely to have rebuilt enough of a credit history to avoid a ding. However, "the best scores we see are from people who have a very long credit history," Sweet says, so a closure's influence on your report's age is something to consider.

I say "consider" here because there are times when closing a card is the right call. For instance, a card with a high annual fee may not be worth keeping -- particularly if you're paying interest on purchases and/or not using it enough to reap any associated rewards.

Moreover, if you're prone to overspending, it may be best to cancel a card since a missed payment will likely hurt your score more than a slightly higher utilization rate or a younger credit history.

"Missing payments is, by far and away, the biggest contributor to deterioration in your score," Davies says. To give you some perspective, a July 2012 report by VantageScore found closing an old credit card hurt a person's score by 10 to 30 points, whereas a first missed payment caused a drop of 70 to 90 points, depending on their current credit score.

Now, given the card in question is your oldest on file -- and depending on its credit limit and how much debt you're carrying on the other cards in your wallet -- you might want to explore other options before terminating the account. For instance, you could elect to close out a younger account with a zero balance and a lower credit limit instead. You could also test out different ways to curb spending.

"If you really can't avoid the temptation, just cut up the card or don't take it with you," Sweet suggests. "Freeze it in a block of ice." If you're still finding ways to circumvent even the most extreme preventative measures, then by all means, go ahead and close the account.

"All of these other things wash out," Davies says, if you develop and sustain healthy spending habits.

Good luck.

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