Will Closing My Credit Card Account Lower My Score?

By Robert P. LaPalme President/CEO of Downriver Community Federal Credit Union

Whether or not your score will go down as a result of closing a credit card account is an important question that you need to consider when you’re paying off debt and working to improve your credit score. It is important because your credit score is a common method used by financial institutions during the loan approval process to evaluate your expected future performance and to determine the interest rate that you will pay on such loan.

Generally speaking, when we refer to a consumer’s credit score, we are referring to their FICO® Score, so named because it was developed by the data analytics company Fair Isaac Corporation.

As with most things relating to your credit, there is no “one-size-fits-all” answer to the question addressed by this article. In fact, despite the myriad of companies, individuals, and credit gurus claiming otherwise, only Fair Isaac knows the true algorithmic formula used in their closely-guarded, proprietary analytic models.

What we do know, however, is that there are two factors which are given an enormous amount of weight when calculating your score: (1) the timeliness of your payments, and (2) the percent of outstanding balances you owe in relation to your total credit limits. This latter ratio of balances-to-limits is sometimes called your “percent of revolving debt utilization”.

Since closing a credit card eliminates your “limit”, you may inadvertently reduce your score by increasing the ratio of balances owed to remaining open credit limits.

For example: a person who owes $1,000 against total credit limits of $5,000, has a revolving utilization of 20%, and still has 80% of their remaining credit lines available to them. If that person closed half of their open credit limits, but still owed the $1,000, they have increased their utilization to 40%, and decreased the remaining credit available. In very general terms, this action is likely to be detrimental to their score, since the algorithm prefers to see less balances owed on higher open limits.

Although many consumers intuitively believe that having less available credit is good, we show in our example that oftentimes the measurements considered in score analytics are complex and the results may not be what they expected. Each person’s situation must be analyzed carefully to determine the best course of action necessary to enhance their score results, and many personal finance companies provide free access to insightful tactics that can help consumers improve their scores over time, resulting in more affordable rates and terms on financial instruments.

At Downriver Community FCU, we’re committed to providing simple access to resources that help you accomplish great things, and helping people improve their credit is one of the service benefits we provide! Not only will one of our Member Service Representatives sit down with you to review your current credit situation, but we’ll also set you up with Credit Sense, a valuable feature of our Online and Mobile Banking that helps you monitor, access, and improve your credit.

If you’d like to receive a free credit review designed to help you improve your score, please give one of our Member Services Representatives a call at 313-3862200, Option 4.

Downriver Community Federal Credit Union is a full-service financial institution founded in 1942 and is owned and controlled by over 13,000 members with three office locations, including Ecorse, Southgate, and Woodhaven. Services are available to anyone who lives, works, worships or attends school in Wayne or Monroe Counties. Businesses or other legal entities located in these counties can maintain accounts at the credit union, as well. Once a prime share account is opened with a minimum deposit of $5.00, the member may enjoy all of the Credit Union´s services, including accounts, lending services, and workshops.

For more information about joining the Credit Union, please contact a Member Services Representative at (313) 386-2200 or visit www.DownriverCU.com.