Think Twice

Impact on Credit Score

Before you close a credit card account, the number one thing you need to understand is that it will likely have an impact on your credit score.

• Credit Utilization. When you shut down a card it affects your credit utilization ratio, which is the ratio between the total credit you have and the amount you use each month. The credit bureaus consider credit utilization when compiling your score. To keep a high credit score, you want a credit utilization ratio of 30 percent or below. If it’s higher than that, lenders may worry that you’re using too much of your credit. When you close an account, this will reduce your overall available credit and your ratio.
• Credit History. Closing a credit card will also impact your overall credit history — another factor considered by credit bureaus. If the credit card carries no annual fee, you’re likely better off keeping it open but not using it.

Authorized User Impact

Another thing to consider before closing a credit card is any authorized users connected to the account. Chances are if you have an authorized user with access to the card, this is because you’re helping them build credit. Unless that person is at the right stage to be set free and build credit on their own, you might want to reconsider closing the account.

Bottom Line

In some instances, closing a credit card can be a good thing. Just make sure you think it through before shutting things down. There’s a good chance that leaving the account open will be the smarter financial move.