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Most people aren’t aware that closing credit card accounts will usually negatively affect their FICO score. That’s because it seems like it should have the opposite effect: reducing the amount of credit in your name means less temptation to overspend, after all.
Credit scoring bureaus don’t see it that way, unfortunately.
The Impact of Closing Credit Card Accounts
When you close your credit card account you’re reducing the amount of available credit you have.
That means an immediate drop in the amount of debt you have in relation to your available credit. This is called the your debt utilization percentage and accounts for a large part of your FICO score. The higher your debt utilization percentage, the lower your credit score. In other words, the more debt you have in relation to your available credit, the worse your FICO.
The good news is there are a number of steps you can take to reduce the impact of closing credit card accounts. After all, sometimes you have too many accounts that you don’t want accessible and open. Other times these accounts may have annual fees attached to them that you no longer wish to pay.
The first step you can take to lower the risk of lowering your credit by closing an account is this: pay off your credit card accounts and loans or get them as low as you can. This will lower your debt, making a closed account less of a deal. (Remember, your FICO takes into account your debt utilization, so if you lower your debt, reducing the available credit will have less of an effect.)
Next, check all three of your credit reports to make sure the balances are being reported correctly. If the balance isn’t correct, contact your credit card company to make sure they update your report. This is important to do before you close your credit card account or all your effort will have no effect.
How to Close Your Accounts
Now you are ready to close your credit card accounts. But you must only close one at a time.
Check the affect each has on your score two to three months later. If it’s small, try closing another account.
If you begin to see a large drop in your FICO score, stop closing accounts for 4 months or so and make payments on time to get the score back up a bit and negate the effect.
Continue slowly closing accounts until you’re through.
Remember, never close more than one credit card account at a time or the effect will be large. Also, make sure you pay down your debt before attempting to close the account so your debt utilization percentages isn’t severely affected.
For more information about your credit score and how to fix your credit reports, check out these articles:
- How Does Your FICO Score Affect a Credit Card Approval?
- How To Clean Up Your Credit Report
- Credit Cardholder’s Bill of Rights Act of 2009