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How Your Credit History is Affected By Closing a Credit Card

Your credit history is just one of the factors affecting your credit score, usually accounting for roughly 15% of the total score. This history would be kept for the next 7-10 years if you closed an account that’s in good standing, or 7 if you had negative items such as missed payments charge-offs, or collection actions.

However, you must keep an eye on the so-called credit utilization ratio, which should always stay under 30%. Your credit utilization ratio defines how much you rely on credit to cover your expenses, and is calculated by dividing your total balance owed by your total credit available. Let’s make an example:

You have three credit cards:

  • Credit card A: $1,500 limit, $300 balance
  • Credit card B: $3,000 limit, $1,000 balance
  • Credit card C: $2,500 limit, $100 balance

Total balances = $1,400

Total credit limit = $7,000

Credit utilization rate = 1,400/7,000 = 20%

A good rule is to try to keep the credit utilization percentage under 30%—-it affects your credit history by a whopping 30%! 

When closing an account, be careful of its effect on your credit utilization ratio- every time you close a credit card, your total credit limit drops by that amount. 

In the example above, if you closed credit card C after paying your $100 debt, your total available credit will drop to $4,500  with an outstanding balance of $1,400. Now that your total credit limit is reduced, your credit utilization rate jumped to 31% –which could negatively affect your score.