CLOSING CREDIT CARDS
THE FACTS
Closing a CC (credit cards) does not lower your FICO scores in and of itself. When deciding to close a CC there is two important things to consider. In the short-term, closing a CC can have an adverse affect on your UTIL percentage calculations and this in itself can definitely lower your scores. In the long-term, a closed CC in good standing (nothing derogatory reporting) with a $0 balance will generally be deleted from your CRs (credit reports) after 10 years. Once this account is deleted, you lose the history and age and this might lower your scores.
SHORT-TERM
The most important factor to consider when closing CCs is the affect on your cumulative UTIL percentage calculation; this is the total sum of all of your CC’s CLs (credit card limits) divided by the sum of their balances.
Utilization Percentages
To fully understand what Utilization percentages are, you must understand FICO scoring has two types of util percentage calculations, one that looks at the extent of utilization on individual revolving accounts (i.e. CCs, overdraft protection and sometimes Heloc’s) and the other is cumulative and looks at the extent of utilization on all of your revolving accounts.
Example
Card 1: CL 5K, balance 1,000 = 20 percent util
Card 2: CL 3K, balance 800 = 27 percent util
Card 3: CL 2K, balance 1,000 = 50 percent util
The total CL (credit limit) is 10,000 and the total balance is 2,800, so the cumulative UTIL is 28%. Not bad but not ideal.
Let's see what happens if you close one of them.
Close Card 1# and pay off the balance:
Total available credit decreases from 10K to 5K
Cumulative Utilization: 5K CL, balance 1.8K = 36 percent
YIKES…Getting worse!
Closed and opened CC TLs are weighed and scored equally by FICO. You will not be punished by simply closing a CC as long as it is in good standing, has a $0 balance and your cumulative Util remains at 1-9 percent. Increasing the CLs (credit limits) on the cards you plan to keep open before you close the card(s) you don't want might be helpful as this too helps to keep your Util percentage low.
Also open and closed accounts age the same. Closing a CC has no affect on average age of accounts or credit history length.
Tidbits (this section is courtesy of moderator, Lel)
- If a closed CC account with a balance continues to report the original credit limit, then both the balance and the CL of the closed account will be used in the utilization calculations.
- If a closed CC account is reporting a zero CL, even if there is a balance on the CC, the card will not be included in the calculations.
- If a closed CC account is reporting a non-zero CL but has a zero balance, the card will not be included in the calculations.
- If a closed account reports a CL that is equal to the balance (balance chasing), then this will be included in the calculations. This is the worst-case scenario with regard to utilization.
LONG-TERM
In the long-term, closing a CC in good standing with a $0 balance will generally be deleted from your CR after 10 years. Once this account is deleted, if your length of credit history and/or average age of accounts decreases in the number of years, your scores might drop.
FINAL NOTES
In the short-term, there should be no adverse affect to your FICO scores, average age of accounts, or the length of your credit history, provided there is no increase in your util% calculations after you close any CC(s). In the long-term, a CC in good standing (nothing derogatory reporting) with a $0 balance will generally be deleted from your CRs (credit reports) after 10 years. Once this account is deleted, you lose the history and age of this TL and this might lower your scores.
