Does Canceling a Credit Card That Is Always Paid in Full Affect the Credit Score?
updated October 23, 2011
Your credit score ranges from 300 to 850, according to Fair Isaac Corporation, or FICO, a credit score company. The score is based on the data contained within your credit report. The higher the score, the better your credit. Consumers with higher credit scores often receive lower interest rates and easier loan approvals than consumers with lower credit scores. The score is not a stagnate number but changes as the data in your report changes, so it's wise to understand how canceling a credit card that you always pay in full will impact your credit score.
-
Scores
-
According to FICO, a credit score has five main components. The bulk of the score, 35 percent, measures how well you pay your bills. The next largest factor is how much debt you have, which is 30 percent. Fifteen percent of the score reflects the length of your credit history, 10 percent is the amount of credit you've applied for recently and the remaining 10 percent is the mix of credit types present on your report.
Significance
-
FICO measures your credit utilization as part of your score. This is the amount of available credit you have versus the amount of credit that you've used. The more available credit you have, the lower this ratio is and the higher your score. The more debt you have, the higher this number is and the lower your score. The crucial factor here is not whether the card is paid in full each month but whether the card has an outstanding balance at the time that you cancel it.
Impact
-
If you cancel the card and reduce your available credit, but leave a balance due on the card and make payments until the card is paid off, this increases your credit utilization ratio and lowers your score. If the card has a zero balance at the time it's canceled, the cancellation of this card does not affect your credit utilization ratio negatively. Keep in mind however, that the reduction in your available credit may negatively impact your utilization in another way. FICO measures all of your available credit versus all of your revolving debt. If you have unpaid debt on other credit cards, but you've decreased the overall available credit that you have by canceling one of your cards, your credit score may drop if this imbalance causes your credit utilization ratio to go higher.
Considerations
-
Canceling a credit card can drop your score in other ways, as well. FICO takes all of your credit accounts and averages them together. Generally, the longer your credit history, the higher your score. If you cancel the credit card, this reduces the average length of your credit history. Depending on how old the card is, this shortened credit history can cause your score to drop, especially if the card is one of the oldest on your credit report.
-
References
- MyFICO: Credit Basics
- MyFICO: What's In Your FICO Score
- MyFICO: Will Closing a Credit Card Account Help My FICO Score?
- MyFICO: Explanation of "Length of Time Accounts Have Been Established"
Resources
- MyFICO: Credit Reports