How Does Closing a Card Affect My Credit?

Your Credit Minute Show Notes:

  • 00:00                      Nik Tsoukales with your credit question of the day. We have, “How does closing a credit card affect my credit score?” So let’s break this down to a science. So, we’re going to uh, you’re going to see here we have the five factors that make up your FICO score. Or, we call them the FICO five, okay? So let’s break down how closing your credit card could or could not affect your credit score, and let’s go into the specific scenarios.
  • 00:23                                   So, let’s say for example, uh, you only have one credit card, and you close it out, okay? What’s typically going to happen is your going to see a massive credit score drop, believe it or not. And the reason for that is, number 130, percent of your credit score is based on debt. Specifically your credit card utilization rate. So, if you cut off all credit cards, um, really you’re not getting any of the points in that specific category, so you’re going to see a drop here. Okay? Um, also, 10% of your credit score is a mix of different types of accounts, okay? So all of a sudden, you don’t have what they call a revolving account. You’re going to see a drop here as well, okay?
  • 01:01                                   The other place you could see a drop is the age, okay? So let’s say the average age or length of history of all of your active accounts um, let’s say that account has some good age on it, or it’s been pretty old, it’s 10 years old, and you, and you, and you, uh, uh, deactivate that card, you’re going to see a drop here, so yes, um, shutting down credit cards could have a pretty big adverse affect uh, or pretty large drop in your credit score, and it can happen very quickly. So, I’d advocate you know, don’t carry balances, don’t carry the credit cards, but it doesn’t mean you need to shut them down. Now, if you think the temptation is too hard to resist, I would suggest taking that credit card, locking it up in a safe. Maybe putting it in a safety deposit account.
  • 01:47                                   If you have it only for the purpose of credit, um, maybe what you want to do, and I’ve advocated this before, is put it in a red cup, fill up the cup with water, stick it in your freezer. Sounds a little insane, why do I say that? For the obvious reasons, okay? You’re not going to make a compulsive decision to buy something, because that credit card is locked up in the freezer, okay? And if you do find something you really, really want, and you want to buy it, your going to have to melt the water. You’re going to have to melt the ice, and you are going to feel absolutely foolish and then going through those emotions, you might actually think twice about your next compulsive decision, okay? So another quick tip in terms of how to keep a credit card without having to use it.
  • 02:27                                   Um, now, let’s say you have a bunch of credit cards. Okay? Let’s say you have five credit cards, and they’re all fairly the same age, okay? And you really just don’t like this credit card, it’s a garbage annual fee. Maybe it’s the type of credit card you got when you first established your credit, and the annual fee really stinks, and the rates stink, and there’s just no purpose behind, and the service stinks, and you already have a bunch of really uh, good credit cards, where you’re getting the points, the rates are super low, you have a decent credit limit, so the utilization rate doesn’t get all wacky when you use it.
  • 02:58                                   That’s one of those scenarios where closing out one of those types of credit cards, you’ll probably see zero adverse affect, really. Because at that point, your utilization rate hasn’t been affected, okay, hasn’t been affected. Um, the age, by the way, this doesn’t mean your age, okay? The age of the accounts. Um, this really hasn’t been affective, because you have other really good healthy aged accounts. The types of credit in use, or credit mix, that’s not really affected either. Okay? So keep that in mind. Um, also payment history … Something else to keep in mind.
  • 03:32                                   Um, 35% of the score is payment history, um, so keep in mind, as long as you have other accounts reporting each month on-time payments, you are going to pretty much maximize this part of your credit score. Um, but if you don’t have enough accounts, you could see an adverse drop in your credit score, scenario one, by closing another credit card, because you could lose some points here, just because you have less accounts reporting an on-time payment. Um, 35% of your score, okay?
  • 03:58                                   So, you know, remember building credit, okay? We advocate opening up new accounts. Not going into debt, okay? Paying um, or using the card um, obviously you’re required to make a payment, but let’s say you haven’t used the card, and it’s a zero balance, by default you still get an on-time payment, okay? So we talk about that in the building process. We don’t need to go into debt to build up our credit report. Well, think of that in reverse. If you got 50 points from building up your credit scores, and use … Or building up those healthy accounts, and you start doing the opposite, just imagine those 50 points pretty much going away, if that’s all you have on the credit report.
  • 04:37                                   Guys, this is your credit minute. If you have more questions about whether or not you should close on an account, that’s definitely a phone call you should make to us, that’s something we can discuss in a free consultation, actually looking at each of the trade lines. Looking at the age of those trade lines, and helping you make a healthy decision on whether or not you should or you should not close something. Have a great day. Bye bye.