Closing Credit Cards Hurts Credit Scores – Episode #78

Is it true that closing credit card accounts hurts credit scores?  Yes, this is true.  Here is the reason.  Your credit score has a major factor called “amount owed” which accounts for 30% of the score.  Amounts owed not only looks at the total amount you owe, but the ratio of the amounts owed or balances against total available credit.  It turns out that people who max out their cards, are riskier.

So why does a person lose credit score points for closing down a credit card they don’t use?  Let’s say they have 6 cards with a total credit limit amount of $30,000 on those cards.  Now, let’s say you close down one that has a $10,000 limit.  Now, your total credit limit available figure is $20,000.  Yet, if your balances didn’t change your usage ratio is higher, and that’s a risk factor for credit scores.

Is it better to have 3 credit cards with high balances, say 50% utilization on all 3 of them,  or 6 credit cards with low balances, such as 25% of utilization on all 6 of them?  From a credit score perspective, the 6 card scenario is better.

I keep saying “from a credit score perspective”, because there are other reasons to close down credit card accounts – divorce, temptation to spend, and high annual card fees, just to name a few. If none of these are impacting you, then you should cut up these credit cards and throw them in a drawer or a safe place.

How much will your credit score suffer?  Not much in many cases, as most of us are closing down cards we use the least that probably have smaller limits.  But, why risk it, especially if you are thinking about a car or home loan anytime soon?

Closing credit cards being a good thing for your credit score is probably the #1 myth.  Check out our other top credit score myths.