There may come a point when you decide you’d like to close a credit card account. Maybe that card charges an expensive annual fee, and you’re not racking up enough cash back or reward points to make that fee worth paying. Or maybe you’re not being charged an annual fee, but you’ve found a replacement card with a better rewards program and don’t want an extra open account in your name.
It’s important to know that closing a credit card account could impact your credit score. But whether your credit score sustains damage in that scenario will hinge largely on how long your account has been open.
FICO is the most commonly used credit scoring model in the U.S. And these are the five factors that go into calculating a FICO® Score:
Payment historyCredit utilization, or amounts owed on revolving lines of creditLength of credit historyCredit mix (loans, credit cards, etc.)New credit accounts you’ve opened
These factors all carry a different amount of weight. Your payment history accounts for 35% of your FICO® Score, while your credit utilization accounts for 30%. The length of your credit history accounts for 15%, while credit mix and new accounts each make up 10% of your score.
It’s for this reason that being late with a single bill payment has the potential to cause a lot of credit score damage — because your payment history carries so much weight in calculating your score. Opening several new credit card accounts in short order could also cause credit score damage, but it generally won’t be nearly the same amount of damage as what you’d face by being 90 days late making a bill or loan payment.
Since the length of your credit history accounts for 15% of your credit score, you’ll want to be careful when closing credit card accounts. But generally speaking, the newer an account is, the less damage your credit score will face when you close it.
Having long-standing credit card accounts is good for your credit score because it shows consistency on your part as a borrower. And so let’s say you currently have three credit cards open plus a mortgage you’ve been paying off for six years, with two of those three credit card accounts having been open for eight years.
If the third account has only been open for 18 months and that’s the account you close, chances are, the damage to your credit score won’t be so substantial. That’s because it won’t shorten the average length of your open accounts. On the other hand, closing one of the credit cards you’ve had open for eight years could cause your credit score to drop, because in that case, you’re shrinking the average length of your open accounts.
Now, this isn’t to say that you should continue to pay an expensive annual fee for a credit card you rarely use just for the sake of keeping that account open and avoiding a small hit to your credit score. Just be aware of the potential consequences of closing a longer-standing account.
Also, if you have a long-standing credit card that doesn’t charge an annual fee, you may want to consider leaving it open. Find a small recurring expense to charge on that account and just pay the bill in full every month to maintain it. It’s an easy move worth making to avoid what could be a modest hit to your credit score, but an unwanted one nonetheless.
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