How much would my credit score drop if I close a credit card?

The Credit Score Conundrum: What Happens When You Close a Credit Card?

The question of whether or not to close a credit card is a common one, often laced with anxiety about its potential impact on your credit score. The short answer is: it depends. While closing a credit card won’t necessarily cause a catastrophic plummet in your score, it can create a ripple effect, especially if you’re not careful.

The primary concern revolves around your credit utilization ratio and the length of your credit history. Your credit utilization is the percentage of your available credit that you’re currently using. Closing a card, even an old one with a low or zero balance, reduces your total available credit. If you haven’t diligently paid down balances on your remaining cards, this reduction in available credit can suddenly boost your utilization ratio, a key factor in credit scoring models. A higher utilization ratio, even if your overall debt remains the same, can negatively impact your score.

For example, imagine you have two credit cards with $10,000 in combined credit limits and carry a $2,000 balance. Your utilization is 20%, generally considered a healthy range. Closing one card with a $5,000 limit instantly increases your utilization to 40%, which is significantly higher and could lead to a credit score dip.

The length of your credit history is another crucial factor. Each credit account contributes to your average account age, a component of your credit score. Closing an older card, especially one you’ve held for many years, shortens your average account age, potentially leading to a minor score decrease. This is because lengthier credit history demonstrates a consistent track record of responsible credit management.

It’s important to note that the impact varies significantly depending on several factors, including:

• Your overall credit history: Individuals with strong, established credit histories will likely experience a less dramatic impact than those with thinner files.
• The age of the card: Closing an older card generally carries a higher risk of negatively impacting your score than closing a newer one.
• Your credit utilization: As mentioned, maintaining a low utilization ratio is crucial to minimizing the negative effects of closing a card.
• The credit scoring model used: Different credit bureaus (like Experian, Equifax, and TransUnion) use slightly different algorithms, leading to varying results.

So, should you close a credit card? It’s not a simple yes or no answer. If you’re struggling to manage multiple cards or are tempted to overspend, closing a card might be a positive step towards better financial health, even if it leads to a minor temporary dip in your score. However, if you’re aiming for credit score perfection and have a healthy financial situation, carefully consider the potential consequences before closing any account, especially older ones with low utilization. A better approach might be to keep the account open but inactive, minimizing its impact on your credit profile while retaining the benefit of its contribution to your credit history. Consulting your credit report and understanding your specific credit profile will help you make an informed decision.