It may seem counterintuitive, but closing a credit card account could actually lower your score. You may be less likely to spend if the card is gone, but without that information on your credit report, the lender has also lost insight that could help them gauge your reliability as a borrower.
There are many different credit scoring models, each a little different from the next, but they generally focus on similar factors. Closing an account affects your credit score based on three main factors: the age of the account, the other types of accounts you have open, and the remaining balances on your other cards.
The average age of your combined credit accounts helps lenders get a sense of how long you’ve been an active credit user. A long positive history of using credit responsibly helps lenders feel confident in your ability to continue healthy credit behaviors. If the credit card account you plan to close is one of your oldest accounts, it could severely hurt the average age of your remaining accounts when it is removed from your credit report. This would potentially lower your credit score, though usually not dramatically.
Your credit mix focuses on the types of credit accounts you have open. Lenders want to see that you can manage different kinds of debt. Having a mix of revolving accounts, like credit cards, and installment accounts, like mortgages and student loans, can help boost this category. If you close the only credit card account you have, it may make your credit mix less diverse and lower your score.
Utilization measures your current reported balances against your available credit lines. For instance, say you have two cards, each with a $1000 credit limit. In this example, you have a current balance of $500 on one card and $0 on the other. $500 out of $2000 is 25%. That’s not ideal because you should try to keep the balance as close to 0 as possible, but it’s still under 30%, which is what lenders like to see.
Now, let’s say that you decided to close the second card because you just paid it off and it no longer has a balance. Your available credit would fall to $1000. If you still had the $500 balance on your other card, your utilization would jump up to 50%. As utilization gets higher, credit scores tend to go lower. But if you were to pay off your balance on your other cards every month, canceling a credit card would have little effect on your utilization.
The good news is that these categories are some of the least impactful in most scoring models. Consistently paying on time and keeping your balances low are the two biggest factors to maintain healthy credit. If keeping another credit card makes you want to spend more than you can afford, or if the card charges an annual fee you don’t want to pay anymore, it may be best to close the account. Ultimately, you may decide closing the card is the responsible thing to do, but be aware that it could have short-term impact on your credit score.