How many points does credit drop when you close a credit card?

The Unpredictable Dip: How Closing a Credit Card Can Affect Your Credit Score

Closing a credit card can feel like a responsible financial decision. Perhaps you’re tidying up your accounts, eliminating temptation, or simply streamlining your finances. However, before you sever ties with that piece of plastic, it’s crucial to understand the potential impact it can have on your credit score. The truth is, there’s no magic number or predictable point drop associated with closing a credit card. The effect varies dramatically from person to person, depending on a complex web of factors within your credit history.

Unlike a missed payment, which carries a more predictable penalty, closing a credit card’s impact is far less straightforward. It’s not about whether the card was used responsibly; it’s about how it contributes to the overall picture of your creditworthiness. Think of your credit score as a mosaic – each card, each payment, each credit limit contributes to the final image. Removing one piece can either barely be noticeable or create a significant gap, depending on its size and position.

Several key variables influence how your credit score will react to closing a credit card:

• Credit History Length: This is arguably the most significant factor. Closing an old credit card, especially one with a long and positive history, can be detrimental. That long history demonstrates responsible credit management over time, a key indicator lenders look for. Removing that history can significantly shorten your average age of accounts, a factor that directly impacts your score.

• Credit Utilization Ratio: This ratio compares the amount of credit you’re using to your total available credit. Closing a credit card reduces your overall available credit, potentially increasing your credit utilization ratio. If you’re already carrying balances on other cards, closing a card could push you into a higher utilization bracket, negatively impacting your score. Ideally, you should aim to keep your utilization below 30% of your total available credit.

• Payment History: While closing a card doesn’t erase your payment history associated with it, the loss of that positive payment history’s weight in your overall credit profile can still have a subtle effect. Consistent on-time payments are crucial to a good credit score, and the more positive history you have, the better.

• Mix of Credit: Having a diverse mix of credit accounts, such as credit cards, installment loans (like auto loans or mortgages), can positively influence your score. Closing a credit card could reduce this mix, though this is typically a less significant factor than credit history length or utilization.

So, what can you do to minimize the potential damage?

• Consider Alternatives: Before closing the card, explore other options. Could you downgrade to a card with no annual fee? Could you simply lock the card away and avoid using it?
• Understand Your Credit Utilization: Calculate your credit utilization ratio both before and after closing the card to understand the potential impact. If closing the card will significantly increase your utilization, reconsider.
• Wait it Out (Sometimes): If you’re closing the card to qualify for a mortgage, understand that lenders often prioritize stability. Waiting a few months after closing the card before applying for the loan might be beneficial.

Ultimately, closing a credit card is a personal decision. By understanding the unpredictable nature of its impact on your credit score and considering the factors outlined above, you can make a more informed choice and minimize potential negative consequences. Remember to regularly monitor your credit report to track any changes and ensure accuracy. While the impact might be unpredictable, being informed is the best defense against unwanted surprises.