Following a financial seminar I recently conducted, a participant wanted to know how closing credit card accounts would impact her credit score. Here are her questions, along with my answers on how to make sure you don’t ding your credit if and when you close certain credit card accounts.
You mentioned that closing credit card accounts hurts your FICO score. If you closed accounts years ago, what is the timeline where it no longer affects your score? I only have one Visa card that I use now. I had no debt issues, just wanted to streamline my cards. Also, do store cards (Macy’s, Nordstrom, Eddie Bauer, Loft) also have the same affect, or is it only Amex, Visa or Mastercard? When the store closes your account, from no usage, does that have any affect?
From a credit-scoring standpoint, it doesn’t matter whether you closed an account or a creditor/store closed it. Either way, the account will shown as closed and it will have a notation such as “closed by creditor grantor,” “closed by credit issuer” or it will say “closed at consumer request,” if you asked to close the card.
You’ll be happy to learn that if you closed an account years ago, that action isn’t hurting your credit score at all.
Remember: the credit scoring system is designed to show lenders how “risky” you are as a consumer. So your credit score is a three-digit number that, in essence, judges the likelihood that you will default on a loan or credit obligation within the next two years. A high credit score means you’re a low risk and not likely to default; a low credit score means you’re a high risk and more likely to default.
To assess risk, the credit scoring system places a high premium on your recent credit behavior. For instance, if you recently paid a bill late – say two months ago – that’s a higher indication of credit risk than if you paid a bill late two years ago.
In general, my best guess is that if you closed an account anywhere from six or more months ago, it’s not really having an impact on your credit score any more. The exception to this is scenario is when someone closes multiple accounts and then puts all their debts onto one credit card.
This can backfire in two ways. First, it reduces their available credit. It also can cause the one remaining credit card to carry a high balance. Both things hurt your credit usage ratio (i.e. the percentage of credit card charged relative to the credit line you have available).
Therefore, it’s almost never a good idea to close all of your accounts at once or to close multiple accounts simultaneously. If you’re absolutely set on closing several credit card accounts, do it gradually – as in close one account and then six months or a year later close the other account, in order to minimize the potential short-term hit to your credit rating.
Lastly, closing retail or department store cards can impact your credit rating just like closing national brand cards, such as Visa, MasterCard or American Express.
The difference, of course, is that the latter cards are more likely to have larger credit limits, so closing those can often have a greater negative impact on your credit utilization ratio.
Even if you prefer to live on cash and to keep your debts as low as possible, it’s still a wise idea to have a credit card. Not only is a credit card handy to use in emergencies or in situations where carrying cash would be unwise or inconvenient, that credit card will also help you to continue to build and strengthen your credit rating.
So get rid of the store cards if you must, by closing them individually over time.
But it’s generally a smart decision to maintain at least one national card. Just manage that card wisely, by charging only what you can afford, always paying your bills in a timely manner, and preferably avoiding interest charges by routinely paying the balance in full each month.