Closing a credit card account affects your utilization ratio immediately, as the credit limit of the closed account is removed from the FICO equation, provided there’s no outstanding balance on the card. Over time, the closed account will also disappear from your credit history, potentially affecting the average age and length of your credit history – both of which are considered by FICO.
Let’s illustrate with a hypothetical scenario: say you possess four credit cards. Card A has a limit of $15,000 with a balance of $9,000; Card B has a limit of $7,500 with a balance of $3,000; Card C has a limit of $7,500 with a balance of $3,000; and Card D has a limit of $15,000 but carries no balance. Hence, your total balance across all cards is $15,000, and your overall utilization is 40% ($15,000 used of $45,000 in credit limits).
Suppose you decide to close Card D. Now, your total available credit drops to $30,000. Consequently, your utilization ratio jumps from 40% to 50% ($15,000 in balances spread across $30,000 in credit limits). Given that utilization constitutes 30% of your FICO score, such a change could negatively affect your credit score.
When it comes to your credit history, the negative effects of closing Card D will not be felt immediately. The card and its history will remain on your credit report for around ten more years. However, once it falls off your report, it could slightly impact your score, particularly if it was your oldest account or significantly contributed to the average age of your accounts.
The real problem arises when you close your oldest card. If you close your only credit card, which is ten years old, and open a new one a decade later, your average age of accounts would drop drastically when the older card falls off your report. Suddenly, it would appear as though you’re new to credit.
Ultimately, keeping older accounts open is vital for your credit health. Only close older accounts when it’s absolutely necessary, and be mindful of the impacts on your utilization ratio and credit history.