If I Close a Credit Account, Will It Hurt or Help My Credit Score?

As with many other questions related to credit, the question above doesn't have a "yes" or "no" answer. Intuition might say that closing a credit card account is a good way to curtail spending and improve your credit score, and in some cases that might be true. But everyone's situation is different, and it's important to look at the five key elements of a consumer credit score and evaluate what the effects might be in your particular case.

Payment history makes up the largest single portion of your credit score - 35 percent - and its effects will remain on your credit report for years after an account is closed. For this reason, it is important to consider your payment history on an account before closing it. In the long run, the way to mend a negative payment history is to make timely payments for a couple of years.

Credit utilization is the ratio between your total available credit and the amount of credit used. For example, if you have two credit cards, each with a $1,000 credit limit, your total available credit is $2,000. If the balance on Card 1 is $400 and the balance on Card 2 is $100, the amount of credit used is $500, or 25 percent of $2000. Your plan might be to pay off the balance on Card 2 and then cancel the account. Take into consideration though, that this would raise your total utilization to 40 percent ($400 of a $1,000 credit limit), a dramatic increase that could actually lower your credit score. Credit utilization accounts for 30 percent of your credit score, making this an important aspect in the decision to close an account. 

Length of credit history represents 15 percent of your credit score. An account that you opened 10 years ago and have always paid on time will show a longer, stronger credit history than a newer account, and perhaps should be kept open and active.

New credit determines 10 percent of your credit score, and refers to the number of new credit accounts you have opened in the past year. If this number is high, it may negatively affect your credit score because it could send a signal to a lender that you're in financial trouble. This aspect of your credit score isn't greatly affected by closing a credit account, unless it means that your only remaining credit accounts are new.

Credit mix shows the number of different credit cards, retail accounts, installment loans, finance company accounts and mortgage loans that are open in your name.1 It’s not necessary to have one of each, and it’s not a good idea to open credit accounts you don’t intend to use. Credit cards are considered revolving accounts and auto and student loans are examples of installment loans2 If you close an account that leaves you lacking in one credit type, the account will still appear on your credit report, but it will be labeled as closed. Credit mix represents 10 percent of your credit score.

In the end, only you can evaluate the wisdom of closing a credit account. Before you close an account it’s worth some careful consideration before you take the scissors to your plastic card.