Let’s get one thing straight. Closing a credit card account DOES hurt your credit score (i.e. FICO Score). Now, the degree that your credit score may be impacted depends on a few factors which we will discuss below.
Credit Utilization Ratio
It is very important to understand exactly what this means. Your credit utilization ratio is your TOTAL credit balance across all credit cards divided by the total credit limit. This means that if you have a $3,000 credit card balance on an American Express card with a credit limit of $5,000 & a $2,000 balance on a Visa card which has a credit limit of $10,000, then your credit utilization ratio would be $3,000 + $2,000 divided by $5,000 + $10,000 or $5,000/15,000=33.33%.
Closing Credit Card Hurts Credit Utilization Ratio = Hurts Credit Score
Given that we now know what a credit utilization ratio means, let’s see how it plays into your credit score when you want to close a credit card account. In the above example, let’s suppose that you want to close your American Express credit card account which has a balance of $2,000 and a limit of $5,000. By doing so, your overall balance doesn’t change BUT your credit limit or the denominator would. It would go from $15,000 to $10,000 and thus your credit utilization ratio would go from $5,0000/$15,000 or 33.3% to $5,000/$10,000 or 50%. Your credit utilization ratio accounts for ~30% of your credit score so this would definitely impact your score. It wouldn’t be devastating for this specific scenario, but the score would drop somewhat.
FYI, just because you close out a credit card account, doesn’t mean your balance goes away too – that stays there until it is paid off.
I Have a Card With No Balance That I Never Use But Pay Fees
In this case, your score would still be impacted by closing the account but it would be minimal. To mitigate the risk, you could increase the credit limit on another card to counter the loss in the credit limit from the card that you would like to be closed.
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