When a lender closes my credit card account, does that hurt my credit score?
What a common question….what impact does it have to my credit scores when a lender closes my account? Long story short…who (the lender or the consumer) closes a credit card account used to make a difference in your credit score. But, that was in the past. The account was given a closed status on the credit report indicating who closed it. An account that was “closed by credit grantor” was considered negative and an account that was “closed by consumer” was not.
If the credit grantor closed the account, it was usually because the account was past due; the individual couldn’t pay or was a high risk. Therefore, “closed by credit grantor” was considered negative and impacted your score negatively. On the other hand, an account that the consumer closed was not considered negative. The consumers’ reasons were not financial such as didn’t use the card, didn’t want it, found a better offer, etc.
As it became common to receive pre-approved credit offers through the mail with low interest rates and incentives, new accounts were opened replacing those with less attractive features. Some consumers did this frequently, and chased the best deals. The meaning of closed accounts changed and was no longer an indicator of risk.
When you close an account, you need to be concerned about the impact to your credit score. It can affect one of the five categories – indebtedness. That category is worth 30% of your credit score.
Credit utilization is in the “amounts owed” category and is impacted when you close an account. It is the ratio of total balances to total credit limits. This indicates how much of your credit you are using; the closer you are to your credit limit indicates a higher risk. For example, your balances total $2,000 and your credit limits total $10,000, you are 20% ($2,000/$10,000) utilized. You close an account with a credit limit of $5,000 so you credit limit totals $5,000 ($10,000-$5,000) and your utilization rate is now 40% ($2,000/$5,000). By closing one account you have doubled the usage of your credit, which negatively impacts your score. You want to keep utilization below 20%.
Who closes the account does not impact your score, but closing an account can. In most cases, it is best to keep your accounts open unless you have too many or you can’t stop using them. Use them once or twice a year to keep them active and pay them in full.
John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. Follow him on Twitter here.