Sometimes, there are good reasons for closing a credit card account. You may have too many and want to simplify your life. Credit cards you never use are easier to lose track of. If one is lost or stolen, you’ll kick yourself for the frustration you could have spared yourself had you cancelled it.
But before closing that account, familiarize yourself with the possible effects on your credit score. Your debtto-available-credit ratio makes up 30 percent of your FICO score calculation. This ratio is the total amount of debt you have on all your accounts as a percentage of the combined credit limits of all the cards. Ideally, you want to be at 30 percent or less of your credit limit. Otherwise, your credit score may suffer. Cancelling a card with a high credit limit could raise your percentage of debt overall, which might lower your credit score.
Your length of credit history makes up a nice chunk of your credit score determination (15 percent). Cancelling a credit card with good standing which has been open for a long time might negatively impact your credit score.
When contemplating cancelling a credit card, make sure the possible repercussions don’t get lost in the shuffle. If your credit is good, a dip of a few points in your credit score probably won’t affect your loan application. However, if your credit is only borderline acceptable, and you want to refinance your home, you might want to hold off on cancelling that account.
