Will Closing a Credit Card Help My FICO® Score?
The short answer is no. We never recommend closing a credit card for the sole purpose of raising your FICO Score. The decision to close down credit cards depends on your reasons for taking this action.
This may sound a bit counter-intuitive; after all, cleaning up your credit profile by getting rid of old or unused credit cards sounds like a good idea - and it may be from an overall credit management perspective. If you are tempted to charge more than you should just because you have more availability to credit, then getting rid of that temptation by closing some credit cards might be your best course of action.
However, your FICO Score takes into consideration something called a Credit Utilization Ratio. This ratio looks at your total used credit in relation to your total available credit; the higher this ratio is, the more it can negatively affect your score. So, by closing an old or unused card, you are essentially wiping away some of your available credit and there by increasing your credit utilization ratio.
It's a bit tricky, so here's an example:
Say you have 3 credit cards. Credit card A has a $500 balance and a $2000 credit limit. Credit card B is an unused card with a zero balance and a $3000 limit. Credit card C has a $1,500 balance and a $1,500 limit:
| Card | Balance | Limit |
|---|---|---|
| A | 500 | 2000 |
| B | 0 | 3000 |
| C | 1500 | 1500 |
In this scenario your Credit Utilization Ratio looks like this:
| Card | Balance | Limit |
|---|---|---|
| A | 500 | 2000 |
| B | 0 | 3000 |
| C | 1500 | 1500 |
| Total | 2000 | 6500 |
Credit Utilization Ratio: 30% = 2000/6500
Now, if you decide to close credit card B because it's an old card that you never use, this is how your credit utilization ratio would look like:
| Card | Balance | Limit |
|---|---|---|
| A | 500 | 2000 |
| C | 1500 | 1500 |
| Total | 2000 | 3500 |
Credit Utilization Ratio: 57% = 2000/3500
See that your Credit Utilization Ratio rose from 30% to 57% by closing the unused credit card?
Some reasons you might have for closing an account:
- Are you applying for credit and is the loan officer instructing you to take this action in order to pass the lender's criteria? Then, it may make sense to take this action.
- Are you taking this action as a means to "self-regulate" temptations you may have to use that card in the future? If so, it may make sense to take this action.
- Are you trying to get negative items on that credit card from being counted? That won't work because FICO Scores still consider payment history and balances on accounts with a closed status.
- Are you taking this action to try to increase your FICO Scores? If so, you may want to reconsider doing so because closing down $0 balance credit cards could potentially decrease your FICO Scores.
The decision to close down inactive or infrequently used credit cards should be carefully evaluated before taking that action. Be forewarned that an action to close down $0 balance or inactive cards will not increase your FICO Scores, and could potentially result in a score decrease.