Does Canceling Credit Cards Improve Your Credit Score?

Reader Question: "We have a few credit cards were thinking about canceling, but I'm wondering what this will do to my credit score (planning to buy a home soon). Does canceling cards improve a score, lower it, or not affect it at all?"

Let me start with those two dreaded words -- it depends.

Mostly, it depends on how old the card is and what kind of balance you have on it. Believe it or not, canceling a card can actually lower your credit score. But before we go any further, let's talk about the five factors that influence your score the most. Here's a chart that shows all five of them:



As you can see by the FICO scoring chart above, the length of your credit history accounts for about 15% of your overall score. With all other things being equal, a longer credit history will produce a higher score -- and vice versa. So if you are canceling your oldest credit card, you will shorten your history in the process. This could make your score drop. How much it will drop, I can't say. But it will likely have a negative impact of some kind.

Now, there's another important consideration here, and that is your credit utilization ratio. In the chart above, this is referred to as the "amounts owed," and it's shown in red. This factor compares your balance to your available credit limit. If you are using a high percentage of your available limit (i.e., you are nearly maxed out on your credit cards), then you will hurt your credit score. On the contrary, if you reduce the balance so that you're only using a small percentage of your available limit, then your score will go up.

So what does this have to do with canceling credit cards? Good question. Your utilization ratio is actually measured across all of your credit cards. So let's assume that you have three different cards. One of them has a pretty big balance, relative to the available limit (a high utilization ratio). The other two cards have low balances, relative to their credit limits. It breaks down like this:

Card #1 Limit: $2,000 Balance: $1,800

Card #2 Limit: $2,000 Balance: $100

Card #3 Limit: $2,000 Balance: $300

In this scenario, my total credit limit (across all of the open accounts) would be $6,000. My total balance across all cards is $2,200. So I'm only using 36% of my combined limit. Yes, I have one card that's nearly maxed out, but I have two others with very low balances. Now let's assume that I pay off cards #2 and #3 and cancel the accounts entirely.

After canceling the cards, my utilization ratio has changed dramatically. Now I only a single card (#1 above), and it has a big balance on it. Guess what happens to my overall credit utilization ratio? It shoots up to 90%. This is a scenario where canceling credit cards will actually lower my score, by increasing my utilization ratio (shown as "amounts owed") in the chart above.

But wait, there's more. If one of the cards I canceled was the oldest of the three, then I've also shortened the length of my credit history. And remember what we talked about earlier -- a shorter history generally means a lower score, relatively speaking. So this is a case where canceling cards has a "double whammy" effect. It increases my utilization ratio, and it also shortens the length of my history. So my score is going to take a hit.

Before Canceling Credit Cards ...

We've talked about a lot of different things here, so let's recap some of the key points. Canceling cards may increase or decrease your credit score, depending on which ones you cancel. The most important thing is your credit utilization ratio, and you can improve this factor just by paying your balances down (and keeping the accounts open). Use caution when canceling your oldest credit card, because this will shorten your history and may lower your score.

If you plan to apply for a mortgage loan in the near future, I would be extremely cautious about canceling accounts. If it has a negative effect (like the scenario I explained above), it might hurt your chances of getting approved for the loan. Your better off paying the balances down and leaving the accounts open. If you've got a few months before you'll be applying for loans, then it's not as big a deal.

I hope this helps you understand how canceling cards might affect your credit score, and I wish you all the best in your future home-buying process. Good luck.