How Closing Credit Cards Lowers Credit Scores

Closing credit cards down can seem like a good idea when trying to keep finances in order. Old cards which are no longer used but still bring unwanted blumph mail can be a nuisance. Those who have worked to put their credit in order may find that additional cards can seem like a temptation better shredded. However closing credit cards can lower ones credit score and isn’t necessarily a good practice.

The amount of credit a person has available on credit lines represents their credit to debt ratio which is a key factor in determining the Fico credit score. Card users who only utilize 30% or less of their available credit receive more points towards their credit scores than those who utilize a higher percentage of their available credit. This is one reason why it is never good practice to ‘max out’ ones credit card as it has an adverse affect on the credit score.

Thus a card user who has a credit card balance of $2000 should ideally have a combined credit limit of over $6500 to balance the credit to debt ratio. Card users who never carry a balance and always pay responsibly are less likely to see a significant drop in their credit scores by closing cards, but if they do so it should be done gradually.

Another key element of the Fico score is ones credit history which can count as 15% of the score. Obviously the longer ones credit history has been established the better, and closing down old credit cards can make a significant difference to ones credit score. Even if the oldest credit card is never used the account should be left open for the credit history it represents. If unused credit cards are subject to dormant activity charges then it is best if they are used occasionally to avoid the charges.

Credit history and credit to debt ratio are two of the key influencing factors in credit scores which is why cards should be left open. However this does not mean that there are not times when it is self defeating to retain them. If a credit card carries an annual charge then it would make sense to close it as there is no need to pay for the pleasure of carrying a credit card. The impact on ones credit score will be negative but it can recover if one keeps the percentage of credit to debt below the 30% mark.

The main thing to bear in mind is that credit cards should not be closed down prior to an application for a mortgage or loans as this is not a good time to do anything which would affect the Fico score negatively. Also if cards are closed down they should be done gradually and not all at once. It pays to know that keeping cards open is more of an asset where ones credit score is concerned than closing them, but that the credit score can bounce back. It is always good practice though to retain the oldest credit card.