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How Closing a Credit Card Really Impacts Your Credit Score

You’ve probably heard the common advice for improving your credit score: Pay off as much debt as possible. Pay all your bills on time. Close any credit card account that you’re not using. Well, it might be time to reconsider that last part. Closing unused credit card accounts isn’t nearly as beneficial to your three-digit credit score as you might think. In fact, it might even hurt your score.

Find out now: Which credit card is right for you?

It’s a bit complicated. But the credit score experts here say that they never recommend closing a credit card just for the purpose of raising your credit score. The reason? Something called credit utilization ratio.

Another Ratio

Your credit utilization ratio looks at how much credit you’re currently using compared to how much total credit is available to you. You don’t want this ratio to be high. In other words, you don’t want the amount of credit you are using to be too close to the total credit available to you. The higher this ratio, the more it can damage your credit score.

When closing an unused credit card account, you could accidentally boost this ratio; whenever you close a credit card account, you’re reducing the amount of credit available to you. This means that your credit utilization ratio will increase even if you don’t add to your overall credit card debt.

Here’s how it works: You might have four credit cards, each with a $2,000 credit limit. Say you have a total of $1,000 in credit card debt. Your credit utilization ratio, or your total debt ($1,000) divided by the amount of credit available to you ($8,000), will be 12.5 percent.

But say you’re closing your fourth credit card because you don’t use it. If you still have $1,000 worth of credit card debt, your credit utilization ratio will now jump to a higher 16.7 percent. That’s because your amount of available credit has shrunk from $8,000 to $6,000. You are now dividing $1,000 worth of credit card debt into $6,000 worth of available credit.

Related Article: 4 Ways to Ruin Your Credit Without Really Trying

Not the Only Factor

Your credit utilization ratio, though, should not be the only factor you consider when deciding to close a credit card account.

It’s important to take your own spending habits into consideration, too. Your credit score will take a larger ding if you run up too much credit card debt or rack up credit card bills that you can’t pay on time.

This is why closing unused credit cards may be a good move if that open line of credit tempts you to overspend. In order to offset the resulting hit to your credit score when you close the credit card account, you can focus on paying down your existing credit card debt (which you should really be doing anyway!).

The Final Word

Our advice? Close that credit card account if you’re worried that you’ll use it to charge that new home-theater equipment that you don’t really need. But keep it open, and pay down your existing credit card debt, if another open credit line won’t tempt you to rack up more revolving debt.

Related Article: 6 Common Credit Myths Explained

Photo Credit: flickr

Dan Rafter Dan Rafter has been writing about personal finance for more than 15 years. He is an expert in mortgages, refinances and credit issues. Dan's written for the Washington Post, Chicago Tribune, Phoenix Magazine, Consumers Digest, Business 2.0 Magazine, BusinessWeek online and dozens of trade magazines.
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