Why closing an account hurts score

Dear Sam,
You'renot alone. In this environment, many people face canceling their creditcards to opt out of negative account changes, or as in your case, areseeing their accounts closed by their issuer.

Anaccount closure will never help your score, but how much impact itmakes depends on what is in your credit report. Barry Paperno, theconsumer operations manager at Fair Isaac, the company that created theFICO score, walked me through the effect that account closures can haveon the five factors that comprise your FICO score.

• Biggest impact: amounts owed. The biggest and most immediate impact on your score is the toll on your credit card utilization, or the ratio of balances to credit limits. About 30 percent of your score depends on that calculation.

Ifyou shutter an account with a zero balance, that credit limit won't getfactored into the utilization calculation. Closing accounts should haveless impact if you have other high-limit accounts that are open and ingood standing.

Let's say you have two credit cards: one with a$5,000 credit limit and one with a $10,000 credit limit. You owe $3,000on the $5,000-limit card and nothing on the other card. Your overallutilization is about 20 percent. If the card with the higher limit getsclosed, your utilization would jump to 60 percent. The utilizationspike could cause a dip in your score.

If you have a balance onthe account when it's closed, the score will include the limit andbalance on the closed account in the utilization calculation. As youpay down the balance your score might improve until the balance gets tozero. "In terms of the impact to your score, you could actually loweryour score once the paid-off, closed account hits zero," says FairIsaac's Paperno. That's because once it's paid off, the credit limit nolonger gets factored into the utilization ratio.

• Secondary impact: length of history and mix of credit. Canceling cards doesn't impact the factor that looks at payment history. As long as closed accounts remain on the credit report, they will get included in your payment history. Once paid off, an account with no delinquencies will disappear from the credit report within 10 years. Accounts with late payments can remain for seven years. When the account falls off the credit report, the score could take another hit, albeit as late as 10 years after closure.

The loss of theaccount can affect two factors: the length of credit history and mix ofcredit, which make up 15 and 10 percent of the score, respectively.Closure of the oldest account would affect the score more than shuttingdown a newer tradeline. Note: the factor that considers types of creditused includes both open and closed accounts.

The silver lining todealing with the ding to your score is that paying down balances onyour other accounts can revive your score again.

Use our FICO score estimator to gauge your credit score for free.

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