What happens to your credit score when you cancel a credit card? There are an awful lot of myths and misinformation surrounding this topic. Depending on who you talk to or what you read on the internet, canceling a credit card can be the best thing that could happen to your credit score, or the worst mistake you could possibly make. Neither of these opinions accurately reflects the way your credit score is actually calculated. Let's take a look at what happens to your credit score when you close or cancel a credit card.
There are two ways in which closing a credit card can affect your overall credit score. The first, most immediate way is that it changes the amount of overall credit available to you. This makes a difference in your score, because roughly 30% of your overall credit score is based on the ratio between the amount of money you owe versus the amount of credit you have.
For example, let's say you have two credit cards. One has a credit limit of $3000, and one has a credit limit of $5000. You are carrying a combined balance of $3500, so you transfer all of your debt to the $5000 card, and pay off the $3000 card. Hooray for you! Having paid off that card, you promptly close it. Well, in this scenario your credit score would go down. Why? You owe the same amount of money, but now you are using more of your available credit, because your available credit was reduced by $3000. Since your balance-to-limit ratio got squeezed dramatically, you are considered a riskier prospect mathematically speaking.
The other way closing a credit card can affect your score is in the long run. An open account with a good payment history will stay on your record for as long as it remains open, usually. However, once it has been paid off, your account will only remain on the credit bureau records for 10 years or even less than that, if the credit card company purges their records and stops reporting it. Once the account becomes inactive, it is only a matter of time before the credit card issuer deletes it completely.
