The Fair Isaac Corporation responsible for developing and implementing FICO scores boldly proclaim "Don't close unused credit cards as a short-term strategy to raise your score," as that action may actually damage and lower your credit score. It is important to realize that by closing account, you do not make your bad credit history vanish. Instead that act of closure can result in a lowered credit score.
There are five main factors that compose the FICO credit score:
- Payment history
- Amount of credit used in relation to total available credit
- Length of credit history
- New credit
- Types of credit used
All factors are considered when calculating your credit score and when you get your FICO score, you are actually just getting a "snapshot" of your current state of affairs. Since your personal credit needs are constantly changing, so will your credit score from week to week. Additionally FICO credit scores considers both the negative and positive aspects of your credit information, and closing a credit card is considered negative.
The most important factor influencing the negativity of closing your account from the five items composing the FICO credit score is the "Amount of credit used in relation to total available credit." When you close a line of credit, you are depleting a portion of your credit line. When the amount of credit is reduced, then the gap between the debt you are currently carrying before you reach your credit limit narrows. The smaller that ration, the less favorable it is weighed by the FICO scoring system, thus lowering your score.
If you feel that closing your credit cards is a must for better managing your finances, make sure you close the right credit cards. Each credit line you have contributes to your credit score and if you close out your longest standing account, your only credit card, a credit card with a balance on it, your only card with available debit, or a card with excellent terms, you are truly doing yourself a disfavor. If this article interests you, read how you can raise your credit score.
