You Should Almost Never Close A Credit Card -- Here's Why
NEW YORK (CBS NEWS) - It seems like common sense: Closing a credit card reduces the possibility of more debt, so that should help your credit score, right? Not so fast. What will likely happen is your score will go down. How much it drops depends on the card you close and its limit.
When you cancel a card, you eliminate some of the available credit that you once had. That changes your utilization rate, or the percentage of available credit that you use. That's an important factor in calculating your credit score, and a lower rate—ideally below 30 percent—is better.
-
Utilization Rate, Illustrated
Say, you have three cards, each with a $1,000 limit. Card A has a $500 balance, Card B has a $300 balance, and Card C has no balance. Together, the utilization rate for the cards is 27 percent ($800 in total balances divided by $3,000 in combined credit limits). But if you close Card C because you don't use it anymore, the combined utilization rate of the two remaining cards shoots up to 40 percent ($800 in total balances divided by $2,000 in credit limits).
"If you're looking for how problematic [closing a card] can be, it can be meaningless, or your score could fall as much as 40 to 60 points if your utilization skyrockets," says credit expert John Ulzheimer. "So there'd better be a good reason [to close a card] because 'I don't want it anymore' isn't good enough."
