Closing That Credit Card Account Might Hurt Your Credit Score

Closing a credit card account, even one that you never use, might not boost your three-digit credit score. In fact, closing a credit account may even have a negative impact on your credit score.

That’s because of something called the credit utilization ratio. This ratio simply compares the amount of credit that you’re currently using with the amount of credit that you have available to you.

For an example of how this credit utilization ratio works, let’s say that you have three different credit card accounts with a combined total credit limit of $10,000. Now, let’s suppose that at the moment, you have $3,000 of credit-card debt, spread across those three credit card accounts that you have. With these numbers, you would have a credit utilization ratio of 30% (the $3,000 of debt divided by the $10,000 of available credit).

Your credit score will be higher the lower your credit utilization ratio is. Now, let’s imagine that you still have three credit cards, but that $3,000 balance we talked about is spread across only two of the credit cards which you have. Also, the credit limit on your remaining card (which currently has a zero balance) is $3,000. If you were to close out this remaining card, the total available credit that you would have available to you would decrease from $10,000 to $7,000. However, your credit utilization ratio will have risen dramatically, up from 30% to 43%.

Having a higher credit utilization ratio could cause your overall credit score to fall. An estimated 30% of your FICO credit score is made up of the amount of money you owe and how it compares to the total amount of credit that is available to you.