Credit Scoring Myth: Closing Accounts Will Hurt Your Score
I’m not sure how or when this idea spread, but at some point in the personal finance online world, it became a generally accepted fact that you should never close a credit card account because it will hurt your credit score. I’ve seen this idea pop up in numerous online forums and in the blogosphere from very knowledgeable posters.
To be fair, there is certainly merit to this position. I would even go so far as to say that it’s a useful rule of thumb. But to paint it as a black and white issue, as an absolute not to be questioned, is where I take issue. There are circumstances where I would argue that accounts should be closed. There are also times when closing an account could actually help your score.
When should an account be closed?
To me, an obvious instance when an account should be closed is if it has an annual fee and the account is one that you could live without. Why pay the fee for a card you will never use? If the only reason you would keep the account open is for your credit score, that is not a compelling enough reason. You should keep your credit score high enough so that you can profit from it, and not maintain it for its own sake. Besides, as long as you have other lines of credit that you maintain responsibly, you’ll eventually recover from any short-term hit to your credit score that closing the account would cause.
How could your credit score be hurt by leaving an account open?
According to this booklet from myFICO (page 12), one of the factors that weighs into your credit score is the average age of your accounts. Consider the very simple example where you had 10 accounts, 5 of which were open for 10 years and 5 of which were open for 5 years. If you closed a few of your accounts that were open for 5 years, that would obviously push up the average age of your accounts and presumably help your score.
Another nebulous factor in your credit score is the “mix” of credit that you’re using (page 14 of the booklet). That is, your score considers what types of credit accounts you have and how many of each. Your score also looks at the total number of accounts you have. How adding or subtracting accounts will affect your score in this respect is very murky.
I have to wonder what correlation exists between closing a credit card account and your likelihood of repaying a debt. If there is no such correlation, then one would think that the credit scoring model should not be penalizing anyone merely for closing an account.
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Hello. It would seem at first that you should close all but the oldest accounts. However, I heard that your score would go down because your running debt balance would be a much higher percentage of your new, lower credit total. Therefore, when, if ever, does closing an account increase your credit score?
Thank you.
You’re absolutely correct that if you close all but your oldest accounts, your score *could* go down because your overall utilization will increase. Let me be clear: I’m not suggesting that anyone close accounts without a good reason. I am merely arguing that it’s possible that closing an account could cause your score to either rise *or* fall.
I already gave an example of when closing an account could increase your score. Let me simplify it even further. Suppose you have 10 accounts. 9 of them have been open for 10 years and each have credit limits of $10,000. 1 of them has been open for 1 year and has a credit limit of $1,000. If you close that newest account, your average account age will increase, but your overall credit utilization will be virtually unchanged.
Hello. You certainly are correct that which accounts you close makes a difference. The effect of the second example on your credit score depends on what modifiers or weights apply to each factor (age and utilization). Do we know the formula(s)?
Thank you.
Another reason to close would be if you did an AOR and ended up stuck with one of those $750 limit cards. Closing it could help because it’s not that old (hurting you there) and more importantly the AVERAGE credit limit counts in the scoring.
J: No one knows the exact formula, since it’s proprietary. myFICO broadly breaks down the categories that are looked at in the booklet that I linked.
Matt: I would be hesitant to close a card just to try to increase your score, as this is something that myFICO explicitly warns against. If you are concerned about getting more junk mail, telemarketing calls, etc., or concerned that you’re increasing the likelihood of identity theft, that might be another reason.
I believe FICO counts closed accounts in determining the “average age of accounts” category.
How I know this? Because I have a large number of closed accounts and without including them my average age would be at least 3-4 times (!) smaller than what it is.
So I think all the arguments that use the average age parameter are baseless.
You’re right. Upon further research, it looks like closed accounts do factor into your average age. It appears that they continue to count until they drop off your report completely.
ccwatcher, can you tell me what research you did that shows that the average age takes in account closed acount? If it does, it means that closing new accounts can hurt your score, because you lock in a very small “age” which drags down your avg no matter what. However, if you leave them open and not use them, that age grows, so it should help your avg age, and therefore your credit score over time. Anyone agree/disagree/know better? Also, when do these accounts drop off your report completely? I have 5 CCs with ages less than 1.5yrs and very low utilization, so I could afford to close them. But should I, is the q. Also, anyone know:
1. By closing accounts, you reduce the NUMBER of CCs, – how much does that improve your credit score?
2. “The length of credit” is determined by the first account opened, even if that account is now closed? or is it only open accounts?
Thanks
Ovidiu,
I recommend that you read this very helpful post, as it answers your questions:
http://ficoforums.myfico.com/fico/board/message?message.uid=41393#U41393