Ask FICO – Close Credit Card

Ask FICO is a new Q & A column where our credit scoring expert, Tom Quinn, answers common credit score and credit-related questions that you have. Post your questions on our Understanding FICO Scoring and General Credit Topics threads on the myFICO Forums.

This month’s question: “I have two credit cards I do not use anymore. Is it a good idea to close them?”

Ask the average American to open his or her wallet and it is highly probable that person will have one or more credit cards.  In fact, the Federal Reserve found 70 percent of consumers had at least one credit card according to a 2015 study.

And many people have multiple credit cards, retail credit cards and other revolving credit that they may use infrequently or not at all.  This past Christmas, I had a relative who showed me her “collection” of more than 50 credit cards!

As credit needs and usage evolves and changes over time for most people, we often get questions about the practice of proactively closing down inactive or unused credit cards.  Is this a good practice?  Are there any negative consequences of doing so?

The decision to close down credit cards depends on your reasons for taking this action.

  1. Are you applying for credit and is the loan officer instructing you to take this action in order to pass the lender’s criteria? Then, it may make sense to take this action.
  2. Are you taking this action as a means to “self-regulate” temptations you may have to use that card in the future? If so, it may make sense to take this action.
  3. Are you trying to get negative items on that credit card from being counted? That won’t work because FICO® Scores still consider payment history and balances on accounts with a closed status.
  4. Are you taking this action to try to increase your FICO® Scores? If so, you may want to reconsider doing so because closing down $0 balance credit cards could potentially decrease your FICO® Scores.

As many Americans use credit cards as a primary or frequent method of payment, their credit card behaviors, as reported on a person’s credit report, can have a substantial impact on their FICO® Scores.  About 30% of a FICO® Score is based on information related to the amount of credit debt reported.  Revolving debt from credit cards, retail cards, etc. is especially important – including information such as the revolving balances owed, the number of cards with a balance and how much of one’s available card limits is being used – and is often described as a revolving utilization percentage.

Example:

Credit Line Balance Utilization*
ACME Credit Union Visa $5,000 $2,500 50% utilized
Main Street Bank MasterCard $10,000 $7,500 75% utilized
Discover $5,000 $1,000 20% utilized
ABC Bank Visa $10,000 $0 0% utilized
Total $30,000 11,000 36% utilized

*the Balance divided by the Credit Line = utilization ($2,500/$5,000 = 50%)

Generally speaking, the presence of higher credit card balances and higher credit card utilization percentages equates to higher credit risk and a loss of points in a FICO® Score.

What if this person were to proactively close down the infrequently used ABC Bank Visa?  The total utilization would increase from 36% to 55% since the $10,000 credit line is no longer factored into the utilization calculation. That increase in utilization (from 36% to 55%) could result in the loss of points in the individual’s FICO® Scores because a 55% utilization is seen as riskier compared to a 36% utilization.

The decision to close down inactive or infrequently used credit cards should be carefully evaluated before taking that action. Be forewarned that an action to close down $0 balance or inactive cards will not increase your FICO® Scores, and could potentially result in a score decrease.

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Tom Quinn

Tom Quinn is the Vice President of Business Development for myFICO and has over 25 years of experience working with consumers, regulators, and lenders regarding credit related questions and initiatives.