Can closing a credit account hurt my credit score?

Understand the potential effects of closing credit accounts on your credit score. Explore the factors to consider and alternative steps to manage your credit.

Closing Credit Accounts: Impact on Your Score.

Closing credit accounts can have both short-term and long-term effects on your credit score. The impact largely depends on the specific account you're closing and your overall credit history. Here's how closing credit accounts can affect your credit score:

Short-Term Effects:

  1. Credit Utilization Ratio: When you close a credit card account, your available credit limit decreases. If you have outstanding balances on other credit cards, your credit utilization ratio (the percentage of your credit limit that you're using) may increase. This can have a negative impact on your credit score, especially if your utilization ratio becomes high.

  2. Average Age of Accounts: Closing an older credit account can reduce the average age of your credit accounts. A longer credit history is generally considered a positive factor in credit scoring, so closing older accounts can potentially lower your score.

  3. Payment History: Closed accounts with a positive payment history will continue to be reported on your credit report for up to ten years, which can maintain some of the positive impact they had on your payment history.

Long-Term Effects:

  1. Credit Mix: Closing an account from a different credit category (e.g., a credit card when you have mainly installment loans) may affect your credit mix. A diverse credit mix is generally viewed positively, so closing a different type of account could have long-term effects on your credit.

  2. Age of Oldest Account: Closing your oldest credit account can significantly affect your credit score because it reduces the average age of your accounts. Your oldest account is valuable because it contributes to the length of your credit history.

Factors to Consider:

  • Type of Account: The impact of closing an account can vary depending on the type of account. For example, closing a credit card typically has a more immediate impact on your credit score than closing an installment loan.

  • Individual Credit Situation: Your specific credit situation and credit history play a significant role in how closing an account affects your score. For someone with a long, positive credit history and low credit utilization, the impact of closing an account may be less severe.

  • Overall Credit Mix: If you have a diverse mix of credit accounts and closing one account won't significantly change this mix, the impact on your credit score may be less significant.

  • Future Credit Needs: Consider your future credit needs. If you plan to apply for a major loan (e.g., a mortgage or auto loan) in the near future, think carefully before closing any accounts, as a lower credit score could impact your loan terms.

In summary, closing credit accounts can have a short-term negative impact on your credit score, primarily by affecting your credit utilization ratio and average age of accounts. The long-term impact depends on various factors, including your overall credit history and credit mix. It's essential to weigh the pros and cons of closing an account, particularly if it's one of your older or better-managed accounts. If you're concerned about the potential impact on your credit, consider discussing your options with a credit counselor or financial advisor before making a decision.