Closing Credit Accounts will Not Help Your Credit Score

Back in 2002, when I was getting rid of my excess credit card debt, I did a stupid thing. I closed my oldest credit card down. I didn’t know, or didn’t care at the time that this move would actually hurt me in terms of building a better credit score.

We all know the importance of a good score: better loan rates, better insurance rates. So today I thought I’d share with you how closing down credit accounts can actually harm your credit score. It does this in two major ways:

1. Raises Your Credit Utilization Ratio

When you close down an active account, the available credit from that account gets removed from your credit file. Therefore, to the credit agencies, you appear to have less available credit at your disposal. They translate this into: not as many people are lending to this person, so they must be a higher risk.

It’s important to keep your credit utilization ratio low. To do this you need to have a lot of credit available to you, but only be using a small amount of that credit. So, if your available balances all add up to $10,000, you need to be using $1,000 – 2,000, not $9,000. From what I hear, this is the case whether you pay it all off each month or carry a balance.

2. Makes Your Credit History Look Younger

The second thing closing an account will do is make you look younger in terms of credit history. One of the keys to a good credit score is a long track record of responsible borrowing. So it’s important to leave those old accounts intact, even if you’re not using it.

But What if You’re Struggling with Debt?

Honestly, the reason I called and cancelled my old credit card accounts back in the day was because I was sick of going in and out of credit card debt. I’d had enough, and just wanted to force myself to quit falling back  into those bad habits of spending money I didn’t have.

So, if the whole reason you’re closing those old accounts down is to free yourself from debt and you won’t need your score for a home or auto loan in the near future, then closing them might be the best choice for you anyway. Also, if the card is charging you an annual fee, that may be enough to justify closing it.

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  1. Well– learning too much latelt about crediet and credit score– I am sure will find more info if I win the book.. BTW I love OTM show on cnbc– lot of good stuff– just have to mention this

  2. This contest is over. Thanks for playing, everyone.

  3. love to win a copy of the book. would read it and pass it on or return it if needed
    thanks so much

  4. really striving to get out of debt and improve both spending habits and credit scores.

  5. MrPlasectomy says

    I recently closed my oldest account fully knowing that my credit score was going to take a hit and by my name I am sure you can tell what I am doing. I have a home and a car so to me closing that account didn’t matter.

    I knew the card number by heart which was dangerous. I didn’t need to have it anymore to make a purchase with it.

    Please don’t consider me in the contest. Thanks

  6. This book could prove really useful to me and my family

  7. @MK…through trial and error, I found out that credit companies submit your info at the end/beginning of the calender month, and that info is generally compiled fully by the 20th of the month.

  8. I closed all my department stores cards like Sears, Macys etc but I still keep open my major credit cards as VISA, AMEX etc although they are in $0 balance.

    I’m following one of Ramsey rules about to buy everything in cash, so if I save a lot money I will be able to buy anything in cash and I will not necessary need my credit score. But now I have doubts about to get good quotes for insurances.

    btw, I love your site. This is really great!.

  9. Would love a copy!!!!

  10. @Jeremy – Maybe my title should have been “it’s a myth that closing accounts will improve your credit score.” I may occassionally flip a title on its head for greater impact. As a blogger I get to do that though. 😉

    Titles aside, I think the advice in the post is valid and well supported by the basic factors that make up one’s credit score.

    I’d definitely encourage anyone serious about improving their score to go out and read Liz’s book. She knows her stuff and has your best interest at heart.

  11. I had also heard about your comment about your credit utilization and keeping it at a low ratio even if you pay it off every month. I seem to recall it has to do when the credit cards send your information to the credit bureaus. Though I wouldn’t even knwo when that is. The end of the calendar month? The end of your statement month?

    As far as the book, I’d love to with a copy! My DBF went through some financial trouble and closed ALL of his credit card accounts! he now has one secured credit card and his debit card, but I’m sure his score is pretty much shot right now. It’d be nice to give it to him as a reference!

  12. Jeremy Olexa says

    Well, it depends on alot of details, to make a broad statement like this seems like alot of hand-waving without any data to back it up.

  13. I did read a few similar articles regarding if it makes sense to cancel or not.

    Its like saying credit is bad and you will never use it.
    Well what happens when you need a mortgage or a business loan? You have no credit history and even if you do it may not be good enough.

    It’s like me wanting to cancel my hotmail account and hotmail being able to reuse my account name 120 days later for a new user, that can create problems for me if people are still emailing me under that account.