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How Closing a Credit Card Affects Your Credit Score

As posted on November 14, 2011 on nytimes.com

By Tara SIegel Bernard

Do you have a chunk of credit-card debt that you keep bouncing from card to card to take advantage of an attractive balance transfer offer? Or have you opened new credit card accounts just so that you can collect extra miles or some other enticing bonus?

If so, you might be curious about how all of this factors into your credit score. In a few words: it’s probably not helping, but not for the reason you may think.

A reader who said he had debt in the “low five-figures” recently wrote to us about this issue. He was under the impression that the FICO credit scoring gods look kindly upon accounts that you’ve held for a long time — and he’s right about that. So his question was this: Will it hurt my score if I close an account shortly after the introductory interest rate expires, say, after a year or two?

The answer: The account closures might hurt his score, but not simply because he’s closing a new account, said John Ulzheimer, president of consumer education at SmartCredit.com. In fact, one of the biggest myths about credit scoring is that closing an account will stunt the aging process. Instead, “you still get the value of the age of the account whether it’s open or closed, active or inactive, balance or no balance,” he said. The account continues to age, even after it is closed. .

In our reader’s case, he already did damage by merely opening up a new account because every new credit inquiry, which happens when you open a new card, could affect your score.

Still, closing the account may still chip at his score some more, especially if it had a sizeable credit limit. That’s because FICO scores are helped by the amount of unused credit you have available, and the more of it you have the better. (This is known as your credit utilization rate. FICO considers how maxed out each of your individual cards is, as well as the total amount of debt and sees how that compares with your total available credit.)

Keeping the account open is likely to help those numbers (though if it has a hefty annual fee, you need to take that into consideration, especially if that money would be better spent paying down debt and you don’t plan on making any major credit-dependent purchase in the immediate future).

“It’s a math game,” Mr. Ulzheimer added, “How much open and available credit do you have compared to your balance?”

People with the highest credit scores, or scores above 760 — on a scale of 300 to 850 — are typically using less than 10 percent of their available credit at any given time, he added.

The bottom line: if the card has a high annual fee, or you simply want to keep things simple and cancel it, go right ahead. Just be aware that it may affect your credit utilization rate, which could hurt your score. Also, one other important thing to note: Those closed accounts are eliminated from your credit report after they have been closed for 10 years. So, at that point, the account closure could ultimately dent your score if your other accounts are much newer.

But the biggest problem for serial balance transfer surfers, or those who continually open new cards, is that they are perpetually adding new accounts. That brings down the average age of all of your accounts.